On June 21, 2018, the Supreme Court issued their ruling on the sales tax case of South Dakota v. Wayfair. The ruling in favor of South Dakota allows the state the ability to expand their definition of nexus from the traditional physical presence test to out-of-state retailers, i.e. online retailers, that, in South Dakota, have more than $100,000 of goods or services delivered into the state on an annual basis or more than 200 separate transactions.
The genesis of the change
Brick-and-mortar stores (whose physical presence and establishment of nexus for sales tax purposes has been relatively straight forward) continue to face an increase in closings. The inclusion of sales tax on the sale of merchandise to customers has arguably proven a disadvantage for these traditional sale fronts. Whereas online retailers who have historically claimed that their lack of physical presence within a state has precluded them from the requirement to collect and remit sales tax. Although a requirement in most states of the consumer to remit use tax in the event sales tax is not collected or remitted has been present, compliance has been extremely low. States are struggling to obtain necessary revenue to pay for bridges, schools, and other state services. Sales tax obtained and remitted from brick-and-mortar stores has declined as the shift towards online shopping has increased. Many states, including South Dakota, have taken it upon themselves to issue legislation attempting to recoup the lost sales tax from these online retailers.
The Supreme Court determined that the old physical presence test in determining sales tax nexus was obsolete for the current economic times of internet retail. The majority opinion was to overrule the old physical presence test in Quill and allow South Dakota to prevail in assessing sales tax for online retailers, if their activities within the state of South Dakota exceed the threshold mentioned above.
The dissenting opinion argued that it was not the Court’s position to make the adjustment to overturn Quill but should be left up to the traditional congressional process. Their argument was that they shouldn’t interfere with economic impact of online retail. In addition, the majority of states were already proposing legislation to work around the traditional definition of physical presence to obtain tax revenue from alternate means that better matched the current economic state and retail environment.
What does this mean?
If you are an online retailer, be prepared for an increase in sales and use tax obligations. Correspondingly, determining liability, assessing tax on purchases, and remitting to states will need to be tracked and maintained. Although software is currently available to assist in these processes, it can be burdensome. With the software still in its infancy, it could cause additional significant burdens, especially for smaller businesses.
If you purchase goods online, be prepared to pay a bit more as the seller will most likely be passing on the additional sales tax requirements to you, the end user.
To determine if you have an additional sales and use tax requirements, or if you have any questions about the topic discussed in this article, contact your Lurie advisor. In addition, states are always looking for additional resources of revenue, if you would like to review your nexus compliance contact your Lurie advisor.