U.S. Supreme Court Ruling in South Dakota v. Wayfair, Inc. – Key Takeaways for all Sellers
posted Jun 28, 2018 by Paul Oliveira, CPA in the Global Tax Blog
Everyone by now has likely seen or heard at least one report regarding the decision handed down by the U.S. Supreme Court in South Dakota v. Wayfair, Inc. which overturns the physical presence standard for sales tax nexus. Most headlines speak to the impact on internet sales, but in fact the ruling will apply to all out-of-state sellers. Based on this ruling a state can require a seller of goods to collect sales tax from its customers even if the seller does not have a physical presence in the state.
By no means does the ruling settle the question about sales tax nexus for out-of-state-sellers; in fact there are a number of questions that remain to be answered. Below are some FAQs about the ruling and what sellers need to be watching for in the weeks and months ahead:
Q: Is application of the ruling limited to on-line sellers?
A: The ruling applies to all sellers, not just those selling through an e-commerce platform. While most of the focus is on internet sellers, any business selling into a state, regardless of how the sale is made, will be subject to the new nexus thresholds.
Q: When will out-of-state sellers need to start collecting sales tax?
A: There are only a handful of states, including South Dakota, that currently have passed sales tax nexus statutes based on “economic nexus”, either the dollar volume of sales made to customers in the state or the number of transactions completed in the state. For these states their laws will generally become effective June 21, 2018, the date of the U.S. Supreme Court ruling. Other states will need to adopt their own revised nexus laws before they can require sales tax collection by an out-of-state seller with no physical presence in the state.
Q: What will be the nexus threshold for sales tax nexus?
A: Each state is free to adopt their own definition of nexus, but many may choose to follow the model of the South Dakota law which defines nexus as having $100,000 or more of sales or more than 200 transactions during a year. Congress could step in and pass a federal law to adopt a uniform nexus standard in all the states, but they have not shown a willingness to act on this subject.
Q: Is there a possibility that a state could apply the ruling on a retroactive basis?
A: The South Dakota law only allows for prospective application, but the question remains open as to whether a state could attempt to require retroactive application. States with existing laws that include in the definition of “doing business” the phrase “to the extent constitutionally permissible” may argue that the ruling allows them to seek a retroactive application of the ruling. Doing so would obviously have very negative consequences for sellers. Retroactive application is an issue to watch closely as the states begin to respond to the ruling.
Q: Does this ruling have any impact on state income tax nexus?
A: The ruling is only applicable to sales tax nexus, but there may also be implications for income tax nexus. Nine states have already adopted an “economic nexus” threshold for their income or gross receipts tax that does not require physical presence in the state. More states may be emboldened to adopt similar laws following this ruling. However, the protections of Federal Public Law 86-272 will continue to prevent a state from imposing an income tax on certain taxpayers, even if the state adopts an “economic nexus” standard.
All sellers will need to evaluate the impact of the U.S. Supreme Court’s ruling on their sales tax compliance obligations. We are always available to help answer any questions you may have. Please contact us at any time if you would like to discuss the potential impact of sales tax nexus on your business.