Business/Mgmt & Tax Concepts

Wayfair Tax Update – Physical Presence No Longer Required for State Tax

July 3, 2018

On June 21, 2018, the United States Supreme Court held in Wayfair v. South Dakota, that physical presence is not required in order for a state to impose sales tax collection obligations. The U.S. Supreme Court found that there is “substantial nexus” for retailers when they meet the thresholds of $100,000 of sales or 200 transactions per year requiring them to collect and remit sale and use tax under the South Dakota law at issue.

This ruling specifically overturned two prior U.S. Supreme Court cases, Quill (1992) and Bellas Hess (1967) that had required physical presence in a state before imposing sales and use tax collection and remittance obligations.

The overturning of those cases by the opinion today means that the dozen or so states that currently have laws on their books specifying that retailers have sales and use tax remittance obligations when they exceed a threshold of sales volume or number of transactions are valid and enforceable. The strong statement by the Court will probably also embolden other states to act to create similar laws for use in funding their states.

This is a massive change for state tax, so now is a time to be thinking about your footprint and your tax filing obligations.

Sales and Use Taxes

For sellers of tangible personal property, this means that you need to start preparing to file in multiple jurisdictions. What you need to be looking at more closely:

  • Taxability of your products, as this can vary state to state
  • Any potential exemptions that apply, and your processes for tracking these
  • Getting your systems and processes ready to comply
Sellers of services and/or digital goods are not off the hook, these businesses need to look more closely at:
  • The taxabilty of those products and services. Digital goods may be taxable as tangible personal property, and services are already subject to sales tax in some states.
  • The sourcing of those sales. The rules may differ substantially from income tax rules, and this matters much more now that lack of physical presence in states does not deter imposition of sales tax on those type of transactions.

Income/Franchise/Business Activity Taxes

The ruling also impacts the ability of states to impose these taxes, as the holding on the “substantial nexus” threshold also applies for income/franchise and business activity taxes.

While not part of the holding, for the 30 plus states that currently have “economic presence” nexus standards for filing obligations, but have not already outlined a sales threshold for filing obligations, the 200 transactions found to be adequate for “substantial nexus” in this case should be a wake- up call for all to look at where they should be filing. While often the analysis as to whether to file in those states has contemplated a dollar volume of sales, this potentially low threshold should concern those that did not file in other states because of a low dollar volume of states and no physical presence.

Here too, sourcing will be important for those that sell digital goods and services to determine the extent of their presence in the state, especially because Public Law 86-272, which prevents income tax on sellers of tangible personal property when they have limited activity in a state, does not apply to these sellers.

Our expert team at Geffen Mesher is ready and prepared to help navigate these changes for your business.

Please reach out to Ashley Klaus, Senior Tax Manager at 503-445-3473, or your Geffen Mesher representative.

To view this Alert in a PDF format, please click HERE.