Last summer, the U.S. Supreme Court released its landmark ruling in South Dakota v. Wayfair, overturning the long-standing physical presence requirement for sales tax established in Quill v. North Dakota, holding that the defendants had established nexus in this case through “extensive virtual presence”. The ripple effect of this legislation has the potential for creating a huge sales tax compliance burden for many e-commerce sellers across the country.
Background
Prior to the Supreme Court’s decision, a state could only force a seller to collect sales tax from a customer if the seller had a physical presence (generally employees or property) in the state where the goods were delivered. Along with many other states, South Dakota felt that the era of e-commerce was causing them to miss out on sales tax revenue from online sales. So, South Dakota passed legislation imposing sales tax collection responsibilities on out-of-state businesses with no physical presence. The law stated that out-of-state businesses must collect and remit South Dakota sales tax if they, in the prior calendar year, had $100,000 of gross revenue or conducted more than 200 transactions with customers located in the state.
South Dakota began filing suits to seek judgments against on-line retailers (one being Wayfair) doing business in the state. The South Dakota Supreme Court sided with Wayfair. At the urging of many other states, the U.S. Supreme Court took up the case and on June 21, 2018 reversed the physical presence test of Quill, offering no rule in its place.
The Supreme Court’s Conclusions
- Commerce has fundamentally changed in the last two decades and, as such, the physical presence requirement is no longer applicable.
- South Dakota’s threshold of $100,000 in annual in-state revenue or 200 in-state transactions is a reasonable basis for creating sales tax nexus.
- By establishing this minimum threshold to require sales tax collection, the state has removed the burden of sales tax collection from the smallest of sellers.
- Larger sellers should have the resources through enhanced technology to correctly calculate sales tax in states where sales and transactions exceed these thresholds.
While the decision did not specifically preclude another state from attempting to collect tax retroactively, it explained how a retroactive application of the law could lead to double taxation and confusion.
What’s Next?
In light of the Court’s decision many states have adopted similar laws to South Dakota, and several are still reviewing their current sales tax nexus rules. Most states adopting the new nexus standards have indicated they will not require retroactive collection, but there is potential for it in states that have not specifically adopted rules against it.
Texas’ Response
The Texas Comptroller has amended Rule 3.286 requiring remote sellers to collect and remit sales tax, regardless of physical presence, on the sale of products or services for delivery into the state. The application of the rule is effective 1/1/19, but the state is not requiring compliance until 10/1/19. A safe harbor threshold of $500,000 in sales for the preceding 12 calendar months has been established. Because Texas has more than 1,500 local taxing jurisdictions across the state with varying rates, the Comptroller is proposing a flat 8%.
The Texas legislature recently passed House Bill 2153 establishing a single local rate for out of state sellers, giving the Comptroller the authority to move forward with their proposal. And, they passed House Bill 1525 setting forth guidelines for marketplace providers and marketplace sellers.
Action Steps for You, the Business Owner
- If you’re selling tangible personal property or services to out-of-state customers, look at that states’ collection requirements or thresholds.
- Consider subscribing to a sales tax software service to help you keep track of rates and collection responsibilities in each state.
- Don’t procrastinate. Make sure you have policies and processes in place.
- Reach out to ATKG–we are here to help!
Since 1982, ATKG LLP has provided clients with the latest news impacting businesses. Feel free to contact one of our tax experts, including Annette Goodson, Sr. Manager at 210.733.6611 or via email at agoodson@atkgcpa.com.
