On June 21, 2018, the United States Supreme Court, in a 5-4 decision, ruled in favor of South Dakota and its economic nexus provisions for sales tax collection. In so doing, the Court overturned its prior decision in Quill (Quill Corp. v. North Dakota), which required that a retailer have a physical presence in a state in order to be required to collect sales tax for sales into that state. In Wayfair, the Court upheld the South Dakota statute requiring remote retailers with annual in-state sales exceeding $100,000, or 200 separate transactions, to collect and remit sales tax.
Months after the Wayfair decision, more than 30 states have either passed or started to enforce sales tax economic nexus laws. While the most common thresholds mirror those of South Dakota, many states have unique thresholds for sales and transactions that stimulate nexus. Some states have started to simplify sales tax collection by allowing remote sellers to charge a single state and local tax rate to consumers in their states; however, this treatment remains the exception, as most states still require the application of the specific sales tax rate at the location of delivery.
Additionally, some states continue to rely on rules passed prior to Wayfair, instead of legislating post-Wayfair rules. Examples include the use of a tax reporting requirement in Pennsylvania and the "cookie rule" in Massachusetts, which require on-line vendors with no physical presence to remit sales tax if specific sales thresholds are met. ("Cookie" refers to ancillary online data stored in a computer or other communication devices). It is important to note that the Wayfair decision did not negate prior nexus-creating activity from earlier years. A taxpayer who registers to collect sales tax under the new Wayfair rules, but had prior nexus due to a physical presence that had gone unaddressed, will still have tax exposure for those prior years.
Recently, California informed taxpayers that the state will begin to impose a nexus threshold of $100,000 of sales, or 200 transactions, starting in April of 2019. Texas announced that it will impose a threshold of $500,000, with enforcement starting in December 2019. Interestingly, the Texas rules include an anti-abuse provision that would appear to allow the state to group related entities for purposes of meeting the sales threshold.
So far Ohio, Washington, and Texas have the most material gross receipts taxes in the United States, but while both Ohio and Washington have sales thresholds for nexus creation ($500,000 and $285,000, respectively), Texas does not. Texas has indicated that the state may consider implementing thresholds for taxes other than sales taxes.
The application of the Wayfair ruling to taxes other than sales tax was expected due to the Court's analysis of the case; should the change be made in Texas, it could be one of the first cases of applying Wayfair to a non-sales tax.
Brooksite GP Recommendation
While multiple bills have been introduced in Congress following the Wayfair decision, none appears likely to pass. Taxpayers should act to address the new Wayfair rules and not wait for congressional action. Since many of the new Wayfair rules are currently in effect, the longer taxpayers take to address collection issues, the larger their potential liability becomes. Taxpayers that make sales of taxable goods or services should act quickly to make sure they are in compliance with the new laws.
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