The Supreme Court of the United States of America issued a number of rulings during June as the justices finalized important pending cases before they adjourned. One opinion, in particular, overruled more than 50 years of precedent and drastically changed the nation’s sales tax landscape by significantly broadening state authority over out-of-state companies.
In the landmark case of South Dakota v. Wayfair, the Court held that a state can impose a sales tax collection and remittance requirement on a company even if it has no physical presence in that state. Wayfair overturned a half-century of precedent, commonly referenced by the Court’s Quill Corp. v. North Dakota opinion, which held that a state could only impose a sales tax collection and remittance requirement on a company that had a physical presence within that state. Given the advent of the internet and online retailers, the physical presence requirement served as a substantial limitation on states’ abilities to generate sales tax revenue in our evolving economy.
Under Wayfair, though, states are now permitted to impose sales tax collection and remittance requirements on companies so long as those duties do not constitute an undue burden on interstate commerce. For instance, the Court in Wayfair found that South Dakota’s law did not create such an undue burden by requiring companies to collect and remit sales tax if the company has $100,000 of gross receipts to South Dakota customers in a calendar year. This was one of many factors in this determination.
And while Wayfair dealt with online retailers of tangible goods, the overruling of Quill’s physical presence requirement can potentially impact any company, not just online retailers of tangible goods. Sales taxes have historically been imposed on the sale of tangible goods. However, as the nation’s economy has become more and more driven by the sale of services, over time states have started to impose their respective sales taxes on specified services, as well. Just like sellers of tangible goods, service providers benefitted from the physical presence requirement of Quill by not being required to collect and remit sales taxes in many states. Without the physical presence requirement, sellers of taxable services are just as susceptible as sellers of tangible goods to being required to collect and remit state sales taxes.
Wayfair is also likely to significantly increase efforts a company must undertake to comply with state sales tax laws. Companies will be required to constantly reevaluate whether its sales have exceeded specified thresholds, as applicable by state. Once the threshold is met, a collection responsibility exists and the company will be required to register for, collect and remit a given state’s sales tax and file a return. Added to this consideration is the calculation of tax, typically based upon the customer’s location, so a company can collect and remit the appropriate amount on each invoice. Many states have multiple levels of tax (state, county, city, special districts, etc.) that all together create thousands and thousands of tax rates in the 45 states that impose a sales tax.
Moreover, for the unwary company that does not consistently revisit whether they have triggered a sales tax collection requirement, a state sales tax audit could result in a very significant tax bill. States may increase the number of audits of out-of-state companies following Wayfair. In a typical audit of a company that has been collecting, remitting and filing sales tax to a state, they are protected by a statute of limitations looking back three to four years. However, if a state’s audit concludes that a company had a pre-existing collection requirement that was not met, there is generally no limitation on the number of years a state can look back and assess tax.
There are certainly mixed opinions as to the full impact of Wayfair. But the one certainty is that the elimination of Quill’s longstanding physical presence requirement has the potential to impact any company, not just online retailers of tangible goods. Thus, it is now more important than ever for companies to revisit their sales tax compliance policies and procedures to avoid becoming responsible for the sales tax that should have been collected from their customers.
Based upon this information, companies should take action to review their sales tax compliance. Typically, this will entail a review of all in-state activity, not just sales, and aligning that with the Wayfair decision and other laws. At the same time, a determination should be made regarding the taxability of revenue items to isolate where revenue is taxable and where a company has a compliance requirement. Depending on transaction volume and size, the implementation of sales tax software to manage collection, remittance and filing, as well as exemption and resale certificates, may be required.•
Daniel J. Perry is an attorney and member of the State & Local Tax Group at BGBC Partners, LLP. Opinions expressed are those of the author.