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Supreme Court Rules on Wayfair Online Sales Tax Case

August 6, 2018

Eugene Ruvere, CPA, MST
Michael Freel

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The recent U.S. Supreme Court ruling on the Wayfair case has left many business owners with much confusion and uncertainty on how to address its effect on online sales tax. There are three basic options available to multi-state businesses that now find themselves subject to these new remote seller rules:

  1. Panic and register in every state that imposes a sales tax;
  2. Do nothing and wait for the states to catch you; or
  3. Conduct a “Wayfair analysis.”

In this article, we will be covering the facts of the recent ruling; what business owners should be doing now to comply with the new sales tax requirements; and how performing a thorough “Wayfair analysis” can be an effective approach to guide you in making the best decisions.

THE FINAL RULING
On June 21, 2018, a closely-divided U.S. Supreme Court issued a highly-anticipated decision in South Dakota v. Wayfair. The ruling holds that states can require online retailers and other out-of-state sellers to collect sales tax, upending over two decades of legal precedent. Impacted businesses include software vendors, equipment retailers, information sellers, and any other business remotely selling goods or services that are subject to sales tax.

Prior to the Wayfair decision, a state was prohibited from imposing a sales tax collection requirement on a seller, unless that seller had a physical presence in that state, pursuant to the 1992 Supreme Court ruling in Quill Corporation v. North Dakota. With a 5-4 Wayfair decision, the Supreme Court struck down Quill’s in-state physical presence requirement.

The South Dakota law at issue in Wayfair requires remote sellers that have either (1) over 200 annual transactions or (2) at least $100,000 of annual sales in South Dakota, to collect the State’s sales tax. The Court found that these collection thresholds were not a prohibited burden on interstate commerce. The Court also noted that the states were losing billions of dollars in sales tax revenue as a result of the physical presence rule, and that in 1992, when Quill was decided, the Court could not have envisioned that an online seller would become the world’s largest retailer.

More than 20 states have enacted some form of remote seller sales tax rules. Some of these apply currently, and some will go into effect in the not-too-distant future.

We anticipate that most states without remote seller sales tax statutes already in place will eventually adopt standards similar to South Dakota’s.

THE POTENTIAL FOR CONFUSION AND ERRORS IS HIGH
Many businesses will be subject to sales tax registration, collection, remittance, and reporting requirements in multiple states that were never considered before. In order to comply with the new sales tax requirements, we recommend that you seek guidance from an experienced state and local tax professional to initially determine the following:

  • Whether your company has any historical sales tax exposure;
  • Prospective sales tax collection responsibilities under the new rules; and
  • Which sales tax registrations should be prioritized based on a number of weighted factors. 

An experienced tax advisor can guide you in taking the following steps:

  1. Analyzing your company’s current sales tax compliance requirements.
  2. Determining the compatibility of your current accounting system with a sales taxability matrix.
  3. Establishing a cost-efficient process to register your company in the necessary states.
  4. Developing a cost-efficient compliance approach.

By taking these steps, a company can make an informed decision on how to best address the effects, if any, of the Wayfair case. If you have questions about how to comply with the sales tax requirements for your business in light of the Supreme Court’s decision, please contact your Citrin Cooperman advisor.

ABOUT THE AUTHORS
Eugene Ruvere is a partner in Citrin Cooperman’s State and Local Tax (SALT) Practice and can be reached at 914.949.2990 or via email at eruvere@citrincooperman.com. Michael Freel is a manager in Citrin Cooperman’s SALT Practice and can be reached at 914.949.2990 or via email at mfreel@citrincooperman.com. Both Eugene and Michael have provided state income tax review services to both publicly and privately-held companies. They advise their clients on state and local tax savings opportunities, exposures, and various SALT issues including income and franchise, sales and use, employment, and property taxes.