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Manufacturing and Distribution Companies: The Potential Impact of the Supreme Court's "Wayfair" Sales Tax Ruling

April 12, 2019

John Giordano, CPA

 

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As seen in HIA-LI The Reporter

Once upon a time, Wayfair was simply one of the more recognizable online retailers for home furnishings and décor. On June 21, 2018, the term “Wayfair”, took on a whole new meaning. In a much-anticipated ruling, the U.S. Supreme Court gave state and local governments the green light to enact a sales tax on retailers that do not have any physical in-state presence. The Court concluded that merely having an in-state “economic presence” was enough to allow a state to require out-of-state sellers to register, collect, and remit sales tax from in-state residents.

The decision in the case, South Dakota v. Wayfair, Inc., was met by cheers from brick-and-mortar retailers, who believed they were at a competitive disadvantage with remote retailers not collecting sales tax from in-state residents. The decision, however, has also left many in the business community confused and concerned with how to comply with the new sales tax laws now imposed by state and local governments.

Manufacturing and Distribution companies that sell online goods and/or services, have drop-shipment arrangements, or simply sell into a state without a “physical presence,” should review their operations, on a state-by-state basis, for possible taxation issues under the recent ruling. Considerations should include assessing where these sales occur, the annual volume of transactions, the existence of any accounting and processing internal controls to identify these transactions, and monitoring procedures, which may need to be revised or augmented. If you have questions regarding sales tax collection requirements in light of the Supreme Court’s decision, please contact John Giordano.

Background

The Commerce Clause of the U.S. Constitution requires that a seller have “substantial nexus” with a state, before the state can require the seller to collect and remit sales and use taxes. Historically, under a precedent set in the 1992 case of Quill Corp. v. North Dakota, this nexus depended on whether the seller had “more than a de minimis” physical presence in the state. The presence could be through the company’s activities, property, or activities of its agents, in the state. Over time, states stretched the boundary of this standard by asserting “click through” nexus and affiliate nexus. Now “economic” nexus policies, like the South Dakota law, stretch it further still, with states asserting jurisdiction to impose sales tax collection responsibilities on companies that meet certain sales thresholds.

In Wayfair, the U.S. Supreme Court considered the constitutionality of a South Dakota law that requires remote sellers, who meet certain sales thresholds, to register for, collect, and remit South Dakota sales tax. Under the law, a remote seller has sales tax nexus with South Dakota, if in the current or previous calendar year the seller had:

  • Gross revenue from sales of taxable goods and services delivered into the state exceeding $100,000; or
  • Sold taxable goods and services for delivery into the state in 200 or more separate transactions.

The Wayfair Effect on Remote Sellers

Sales and Use Tax Obligations

The Wayfair decision affects companies doing business in thousands of state and local tax-collecting jurisdictions across the country. The most immediate impact is on sellers with a significant virtual or economic presence in a state that has enacted sales tax laws similar to South Dakota. In the months since the Wayfair decision, over 30 states have adopted economic nexus provisions, with varying enforcement dates and compliance requirements. Remote sellers delivering products/services into states with economic nexus policies must now determine the following:

  • Whether the seller has surpassed the dollar amount or transaction volume thresholds for establishing nexus with the state;
  • Whether the seller’s products/services are subject to sales tax in the applicable state;
  • How to register, collect, remit, and file sales tax returns in order to be in compliance with state and local tax laws; and
  • How to monitor ongoing sales to determine future sales tax compliance requirements

Sellers should prepare for states to enforce expanded nexus provisions, however, future legal challenges or Congressional action could limit the scope of the Court’s decision.

Other Considerations

Expanded sales tax nexus will have far-reaching effects for businesses, beyond collection and remittance of the sales tax itself. In the realm of business acquisitions, state “successor liability” laws typically impose notice, withholding, and tax clearance requirements. These limit the purchaser’s liability for the seller’s unpaid sales tax liabilities in certain business asset acquisitions.

As states begin to assert sales tax nexus more aggressively, companies contemplating business acquisitions should consult with a tax professional for assistance in navigating complex successor liability laws. Companies should also consider potential financial statement impacts related to sales tax nexus issues.