On 21 June 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair. In a 5-4 decision, the Court upheld South Dakota’s application of an economic presence rule for state sales/use tax jurisdiction (or nexus) purposes. Prior to the Court’s decision, a state’s jurisdiction to tax was traditionally limited to those vendors with an in-state physical presence. The Court’s decision in Wayfair allows the states to subject U.S. and non-U.S. remote vendors to a sales/use tax compliance obligation.
In its decision, the U.S. Supreme Court overturned the physical presence nexus standard in favour of an economic one, thereby removing constitutional barriers to states’ lawful ability to collect sales and use taxes from out-of-state sellers. The Court agreed that South Dakota’s statute requiring a remote seller to collect and remit sales/use tax if: (1) the seller’s South Dakota sales exceed USD 100,000; or (2) the seller has more than 200 separate sales transactions into the state, was a reasonable standard for the purposes of substantial nexus.
Now, 18 months later, all but two states have enacted economic nexus rules. Only Missouri and Florida do not have enforceable economic nexus statutes in place, but both have draft bills currently progressing through their legislatures. However, before taking any registration action, each state’s economic nexus enforcement dates and revenue thresholds should be carefully reviewed because they can vary widely from the standards set in South Dakota’s statute.
For example, Maine has an enforcement date beginning July 2018 where Oklahoma’s enforcement date was delayed until November 2019. (Florida is expected to enforce its economic nexus rules beginning July 2020.)
Another difference, for example, can be seen in sales thresholds: South Dakota has a sales threshold of USD 100,000 or 200 separate transactions in a calendar year compared, for example, to California’s sales threshold requirements of USD 500,000 without taking any separate transactions into consideration.
Please visit our website at www.bdo.com/wayfair for the most current information for all states’ economic nexus enforcement dates and economic revenue thresholds.
Given that Wayfair’s additional economic nexus standard does not require physical presence, a company that conducts business without physical storefronts, especially online retailers and those engaged in other forms of digital or remote commerce, are the most impacted by the widespread change in state sales/use tax nexus rules. And, of particular note to non-U.S. vendors, U.S. tax treaties typically do not apply to state and local taxes applicable to U.S. and non-U.S. vendors alike.
Also note, some states and cities, as a result of Wayfair, began to impose similar economic thresholds for income and gross receipt-based taxes. Please visit our website, for additional coverage on this topic.
A vendor will need to know where, what, and when to file, and which sales are subject to tax. In addition, the vendor will likely need the infrastructure in place to comply with the sales/use tax laws of potentially significantly more states.
The first step in addressing state sales/use tax compliance requirements is to identify the jurisdictions where a company has a requirement to register for sales/use tax purposes. In addition to any current and/or future filing obligations under an economic nexus standard, a company should also assess whether it has any latent historical filing obligations under the traditional physical presence nexus regime.
Therefore, companies should assess their nexus footprint under both physical and economic standards, quantify potential historical liabilities, and consider mitigation of any historical liability through a voluntary disclosure agreement, settlement, or similar strategy before registering with a taxing authority, since most jurisdictions disqualify registered businesses from participation in voluntary disclosure programs.
The effective dates for registration and collection requirements under these new laws vary among states and companies should be aware of such compliance dates. As discussed above, the measurement periods and thresholds for determining when a company may have breached the economic nexus thresholds vary by state. Thus, it is important to determine with preciseness when a business satisfies the parameters of economic nexus to ensure proper compliance.
The taxability of traditional tangible goods is relatively straightforward. Unlike traditional tangible goods, digital products and services are generally difficult to categorise for sales/use tax purposes. State sales/use laws are typically antiquated, and, as a result, they do not clearly define or address the taxability of digital products and services. This lack of clarity in laws causes challenges, as well as pitfalls, in discerning the proper sales/use tax treatment of a company’s products and services.
Even after a successful analysis and categorisation of a product or service, companies should also address the taxability of ancillary products and service offerings, including set-up, maintenance, training, and other revenue streams. In addition, a company’s invoicing practices (for example, bundling charges vs. itemised listing) could also have tax implications that should also be explored.
Products and services subject to tax are typically taxed in the jurisdiction where delivered or used. Unlike tangible goods, digital products and services generally do not have a shipping address and the location of use or user may be unknown or involve multiple locations. Consequently, companies should be prepared to address revenue sourcing issues related to digital goods or services to ensure reporting to the proper jurisdiction.
When faced with invoicing sales/use tax to customers in multiple states, businesses typically need a solution for keeping track of sales/use tax rates of more than 10,000 potential state and local taxing jurisdictions that automatically integrates into a company’s billing system. In addition, an exemption certificate management solution should also be considered for businesses that sell to exempt customers (for example, reseller, government, or not-for-profit).
Businesses with limited staff or trained personnel may want to consider implementing a solution or outsourcing their sales/use tax compliance function to a third-party, since sale/use tax compliance in a multistate environment can be a complex and time-consuming process. This will also reduce costly risks of non-compliance, where the company and its corporate officers may become personally liable for sales tax obligations. Fortunately, there are a number of third-party software solutions and outsourcing companies capable of assisting with sales/use tax compliance. However, a careful evaluation of software solutions and outsourcing providers should be made, including the cost, implementation complexity, compatibility with the company’s accounting system, scalability to grow with the company, and most importantly, availability of operational support, as most businesses will likely face questions from internal and external sources that are not used to seeing sales/use tax charged on their invoices.
The Wayfair decision significantly broadens the jurisdiction of U.S. states to subject U.S. and non-U.S. remote vendors to sales/use tax compliance requirements, which has the potential to increase the number of U.S. state sales/use tax laws with which a vendor selling into the United States may have to comply. Further, the lack of uniformity among the states that impose sales/use tax and the existence of over 10,000 local taxing jurisdictions has the potential to cause significant challenges when discerning the what, where, and when of state taxation. Coupling the number of potential taxing jurisdictions with a general lack of conformity among states has the potential to increase the infrastructure and resources that a company must direct at their U.S. sales/use tax compliance function.