The recent Supreme Court ruling of South Dakota v. Wayfair will bring major changes to sales tax for most businesses. The case challenged South Dakota’s sales tax on internet retailers who do not have property or employees in the state. Historically, property and employee standards for taxation were part of the requirement set by the Quill Corp. v. North Dakota ruling from 1992 which limited a state’s ability to tax interstate commerce. The Wayfair decision overruled the Quill Corp standards allowing states to collect sales tax without physical presence. This ruling is significant and will affect every company that sells a product or service over state lines, not just online retailers.
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Sales and Use Tax and Economic Nexus Basics (01:35)
Sales tax is tax assessed to the end user on property or services at the state and/or the local level. Each state differs on how they set the rate and what transactions are taxed, some are destination based and others are point of sale. Use tax is a self-assessed tax paid in your home state on goods and services where you did not pay sales tax. Typically, there has been low compliance of self assessed use tax.
(05:12) – Nexus is the minimum connection with a state in order to have a filing requirement. Just like with sales tax, every state is different. Before the Wayfair ruling, nexus was determined by physical presence. As a result of the Wayfair ruling, Economic nexus is the new standard and is being adopted by most states. Simply, economic nexus is created where the ultimate benefit is being received. Physical presence and some other types of nexus, for example click-through nexus, affiliate nexus, etc., will trump economic nexus and may affect your reporting requirements.
There are many different ways states are defining nexus and it’s important to keep in mind where you’re shipping your products, who is receiving your services, etc., instead of where you business is physical present. It’s also important to remember that each state sets their own nexus standards on the state and local level so reporting requirements are likely not the same from one state to another.
South Dakota v Wayfair Ruling (12:25)
At issue in the South Dakota v. Wayfair case was the standing commerce clause that had been shaped over various rulings through the years. The commerce clause defined a state’s authority to regulate interstate commerce. Our economy and how we buy and sell our products and services has changed dramatically since the clause was developed. There are less brick and mortar stores and we buy a majority of our products and services from online retailers. The result is large amounts of missed state revenue from products and services being purchased across state lines.
(17:02) – Almost every state, losing out on an estimated $8-$33 billion sales tax revenue, wanted to overturn the physical presence test of the commerce clause. In 2016, South Dakota wrote new sales tax laws that contradicted previous rulings and set a standard of $100,000 in gross sales a year or 200 transactions to create economic nexus. Wayfair challenged South Dakota and the resulting Supreme Court ruling favored South Dakota 5 to 4. The Supreme Court ruled in favor of the South Dakota law citing a reasonable threshold, wasn’t retroactive, and did not put undue burden on interstate commerce.
Any business selling out-of-state that meet certain sales thresholds now are affected and physical presence is not a requirement. Above all, there are over 10,000 tax jurisdictions so it’s important to understand the transaction taxability in each state and make sure you’re meeting the reporting requirements.
What Every Business Needs to Do (32:40)
- Keep accurate records with ship-to addresses
- Update current paperwork procedures
- Review annual sales by state
- Review for other types of nexus
- Educate employees on compliance
How DHJJ Can Help
Physical presence is no longer the test to determine state taxability. Economic nexus, among others, is the new standard for determining business reporting requirements. If you have questions about how the South Dakota v. Wayfair ruling affects your business, contact the DHJJ State and Local Tax Group.