Yes, we’re back chatting taxes again with Mary Jo Dolson, of the tax and accounting firm of Skoda Minotti. It’s time for a look at the Supreme Court case that redefined the tax landscape: Wayfair vs. South Dakota. This ruling will likely have long term impacts on both your personal purchasing habits and on your professional tax liabilities so, sit back as Mary Jo tells us all about it!
Mary Jo, thanks for coming back. Can you give us some background first?
Mary Jo: Glad to be back. For me, this is where the fun begins!
Currently 45 states and the District of Columbia have a sales/use tax. The states currently that do not have a sales/use tax are the following: Alaska, Delaware, Montana, New Hampshire and Oregon. If a state has a sales tax in place, the state has a corresponding use tax. Generally, in most states the sales tax rate and the use tax rate are exactly the same.
Sorry to interrupt, but what’s a use tax? I know what a sales tax is of course.
Mary Jo: Basically sales and use tax are the same: they are imposed on the same type of goods/services. Sales tax is what you pay to a vendor on an invoice and use tax is imposed in some cases if a sales tax was not charged on a purchase. For example, I understand that you live in Oregon, one of the tax free states. Sometimes the state of California will try to collect a tax on a purchase one of their residents made over the border in Oregon but plans to use in California—like a car. So while the California resident didn’t pay Oregon sales tax (because there is none!), they might be subject to a California use tax.
In that scenario, the California resident might have physically crossed the border to go shopping but these days, many people don’t even leave their home. And many people are under the misconception that if something is purchased over the internet then it is not subject to sales tax. This is can be a very costly misunderstanding. If you purchase a pair of shoes in a retail store you would be charged sales tax. These same pair of shoes, if purchased over the internet, would still be subject to sales tax.
I don’t plan on addressing the potential exemptions available in the different states that apply to sales tax but instead want to consider the nexus requirements to charge sales tax. All businesses would potentially have the requirement to collect and remit sales tax to the different states and I want to now dig into these requirements.
Thanks, and yes, I think it’s best we focus on the business impact. I don’t really want to think about what my Amazon purchases might actually cost me.
Mary Jo: Well, as we discussed previously, it all comes down the concept of “nexus,” which is establishing sufficient contact with the state to require a business to comply with the existing laws of the state. Prior to the landmark decision in Wayfair versus South Dakota, there was only a physical presence standard in place for sales tax nexus purposes.
The Supreme Court had previously determined in two cases (called “National Bellas Hess” and “Quill”) that a physical presence was required for a state to impose its sales tax laws against taxpayers. (This physical presence might be a plant in the state, an office in the state, property in the state, consigned inventory or even an employee in the state. As we had discussed before, public law protection does not apply to sales tax having an employee in the state is sufficient to create the required physical presence for sales tax.) “National Bellas Hess” was a 1967 ruling, so for over fifty years, the physical presence standard was all a business had to understand: a relatively easy concept and potentially easy for a business to avoid.
How did they change such a long standing determination?
Mary Jo: The first crack in the standard came in 2015 when the Supreme Court issued its decision in the “Direct Marketing case.” That case upheld the physical presence standard but in the dissenting opinion, Justice Kennedy really just dared someone to bring a case to them to specifically address the physical presence standard. With that much money on the line, you can’t dare the states and expect them to sit back and do nothing. Many states started adopting an economic nexus standard of so much dollar value in sales and/or number of transactions.
South Dakota was one of these states enacting a standard of $100,000 in sales or 200 transactions as an economic nexus standard. The state immediately went after some large vendors who they knew were not collecting South Dakota sales tax – Wayfair being one of them. South Dakota’s law was enacted in March 2016 and by January 2018 the case was seeking a hearing before the Supreme Court. The Court heard the case in April 2018 and in a June 2018 5-4 decision, the Supreme Court decided in favor of South Dakota and upholding an economic nexus standard.
That’s fast work indeed from a suggestion being made in 2015 to a case ruling overturning fifty years of policy in 2018. And that resulted in?
Mary Jo: Fast action by almost every state to start charging!
Seriously, the bottom line is that if a taxpayer has sufficient sales in a state, that entity must now begin collecting sales tax in a state. It no longer matters if the taxpayer does not have a physical presence in the state. You can only imagine how quickly after the decision the various states started enacting an economic nexus standard.
Currently, excluding the states that do not impose a sales tax at all, all but three states (Florida, Kansas and Missouri) have adopted an economic nexus standard. The effective date of these statutes ranges from 06/21/2018 through October 2019, depending on the legislation dates.
The one bit of good news is that even though numerous states had economic nexus standards in their statute before the Supreme Court decision, no state has enforced these standards retroactively. All states have taken a prospective approach for economic nexus standards.
Taxpayers must now look to their sales per state to determine if economic nexus has been created and the effective date of statute. The Supreme Court decision did not remove the physical presence standard, rather it gave the green light to another standard. Therefore, a business needs to look at the economic nexus standards but also needs to determine if previous exposure existed because of a physical presence in a state.
I believe the state’s in the future will begin researching to determine if a taxpayer established a physical presence before economic nexus was established. It is important for businesses to know what their activity was in state before economic nexus was enacted. As previously stated, economic nexus does not eliminate previous physical presence standards. If an entity registers with a state because of economic nexus standard in 2018 but had an employee in the state since 2015, the state could impose a sales tax requirement back to 2015.
Ouch! Is there any relief to that?
Mary Jo: It is important to know these issues so that a taxpayer can address them before a state approaches them. A taxpayer has options to address past nexus issues mainly utilization of a state’s voluntary disclosure programs. Under a voluntary disclosure program a business can come forward and address past exposure usually without any penalties being imposed.
Once sales tax nexus is established with a state a taxpayer must take several steps. First a taxpayer, must determine if the products being sold or the services providing are taxable in the different states. Just because nexus is created it does not mean that every activity of the taxpayer is taxable. Secondly, the taxpayer must determine if their customers in the different state are taxable. For example, some states provide an exemption for non-profit entities. Lastly, they must register for sales tax collection and filing. If it is determined that the product and/or the service the taxpayer is providing is exempt, the taxpayer must secure exemption certificates to exempt the sale.
Businesses were not always diligent in securing exemption certificates to support the exempt sales they made to customers. These exemption certificates will become more and more important as the economic nexus standards are in place. Also, it is important to secure exemption certificates from businesses when product is sold or service provided because if and when you are audited and do not have exemption certificates, the business might be out of existence and you might not be able to secure.
Next time I want to talk about the actual taxability of product and services in general.
Wow, thank you. Scary stuff, but since ignorance is not an accepted excuse by the government, it is best that we know. Thanks for the help!
Elizabeth Baldwin is Environmental Compliance Officer for Metropolitan Hardwood Floors. In her 25 plus year career in the wood industry has visited over 70 countries and hundreds of facilities of all sizes and types. She describes herself as a “jack of all wood trades.” Familiar with jungles of all sorts–having camped out along the Amazon and walked the halls of Congress–she blogs for the NWFA on both environmental and regulatory issues for educational and informational purposes only. Her blog is not intended and should not be construed as legal advice. Persons seeking legal advice on compliance with CARB, TSCA, the U.S. Lacey Act or any other law, regulation, or compliance requirement/claim should consult with the regulatory agency directly and/or a qualified legal professional.