U.S. Supreme Court overturns Quill’s “physical” presence standard State & Local Tax Alert

The U.S. Supreme Court on June 21, 2018, issued its anticipated decision in South Dakota v. Wayfair Inc., et al, overturning the 1992 Quill physical presence standard used for sales tax. The implications will be monumental and affect most industries who sell tangible personal property or services across state borders.  Businesses that could experience the most significant impact will be on consumer products such as retailers or software providers, but any seller could be affected.

Why is Wayfair so important?

Before Wayfair, sellers of taxable property or services were subject to a state’s sales and use tax laws only if the seller has established a nexus with the taxing jurisdiction through a “physical presence” in the state. Thus, inventory in the state, offices in the state, or a sales force in the state would meet the “physical” presence nexus standard.  As a result, remote sellers—those without a physical presence in the same state as their customers—had no obligation to register, collect and remit sales taxes. However, purchasers/ consumer remains legally required to remit the complimentary use tax on such transactions but use tax compliance is historically low.

The Wayfair decision now eliminates the physical presence requirement when it found constitutional a South Dakota economic sales tax law that established nexus for remote sellers (with no physical presence) who made more than $100,000 of sales or 200 or more transactions into South Dakota.

How are remote sellers affected?

Wayfair applies to all states and affects all remote sellers, not just Internet-based sellers. Now sellers may have a sales tax collection obligation in every jurisdiction in the country where they have sales.  For these businesses, numerous compliance headaches now need to be addressed in many states:

  • What are the correct tax rates?
  • What is taxable (an item that’s exempt in one state may be taxable in another)?
  • How often must a return be filed?
  • Must the seller register with the state?
  • Are local sales taxes also due?
  • When will the first sales taxes be due?
  • Do I need to expand my exemption certificate maintenance system?
  • Do I need to update my tax software?
  • Do I need to purchase a software solution and how much will this cost?
  • What if I’m unable to prepare in time?

The resulting compliance obligations and strategic approach to these issues will require significant time and expertise—that’s how Hall & Company can help.

Uncertainty Ahead?

Wayfair has only caused more questions and more uncertainty. Businesses will be asking a number of questions, many of which have not been affirmatively addressed by the U.S. Supreme Court or Congress. States too will have to determine how they will approach compliance. A sampling of those questions follows:

  • What about historic sales tax liabilities? Am I at risk for collection?
  • May I be required to collect sales tax now in a state that has not yet passed an economic sales tax nexus provision?
  • What if a state enacts an economic sales tax nexus provision with a sales threshold lower than the threshold reviewed by the U.S. Supreme Court of more than $100,000 of sales or 200 or more transactions in the state?
  • Are my sales now subject to audit for past periods? Does Wayfair mean I am now responsible for sales tax on sales made before the decision?
  • Are service providers subject to these rules?
  • What does this mean for foreign sellers with U.S. customers? Are foreign sellers subject to U.S. sales tax collection obligations?
  • Does this decision affect other state and local taxes?
  • How are states going to respond and when will they respond?

What Hall & Company can do for You?

  • Help you understand current nexus footprint.When was the last nexus analysis conducted? A “Nexus Decision Matrix” is an approach to qualifying and quantifying nexus issues by state and identifying how best to resolve from a business perspective based on a risks tolerance approach. This approach may consider VDA and amnesties for significant noncompliance to “catch-up” with current nexus framework. Other state and local taxes may also be an issue.
    • Re-evaluate current approach to sales tax collection. It may be advantageous for some remote sellers to begin collecting the sales tax, rather than stay up-to-date with the various state responses to Wayfair.
    • Re-evaluate current plans. Sales tax collection may now be unavoidable, and prior planning strategies may no longer apply.
    • Retroactive application of the decision may still be an issue.
  • Maintain state legislative and regulatory tracking of nexus expansion laws. With the elimination of the physical presence standard, expect fragmented state responses, and the possibility for congressional activity to increase. Congress can overrule the U.S. Supreme Court on this issue under their Commerce Clause authority.
  • Consider ASC 450 (Contingencies) issueswith states that have economic nexus, where: 1. Economic nexus or use tax reporting laws were enacted or promulgated 2. The business chooses to not comply with the law. Remember that many of the provisions do not require collection while under litigation.
  • Consider the new use tax reportingand notification compliance obligations on remote sellers. More than 10 states have addressed use tax reporting. This is also an ASC 450 concern.
  • Automate your tax compliance.In the aftermath of the physical presence erosion and the Wayfair case, a sharp increase in required filings may be required.Sales and use tax compliance and automation is a required discussion.

 

Takeaways

Very little is settled in the wake of theWayfairdecision.Congress still has the authority to implement a remote seller solution or to codify the physical presence standard into federal law. It is a wait-and-see situation whether Congress will take up the issue.

Wayfair creates more questions than it provided answers. Understanding how the new sales tax nexus standard affects your business is crucial.

In the foreseeable future, the Wayfair decision will ripple through state legislatures and business as they dissect the Justices’ analysis and impact on the future of state nexus cases.

 

For questions about Wayfair,please contact Hall & Company www.HallCPAs.com or Michael Nunez 949-242-0587 or michael@hallcpas.com

 

 

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