Does Your Business Need to Charge Out of State Customers Sales Tax?

“Nexus” determines whether your business must collect and remit sales tax in another state.  If you have nexus, you must collect.  Nexus is a Latin word meaning connection.   Sales tax nexus occurs when your business has some kind of connection to a state.  Until this connection is established a state cannot require you to register and collect sales taxes.

So, what creates nexus?  The answer to that question changed last year in a historic landmark case when the Supreme Court in South Dakota v. Wayfair overturned a 1992 court case Quill v. North Dakota. If you’re not familiar with this case then you need to keep reading, because it will have a huge impact on business owners.  

What was the South Dakota v. Wayfair case all about?

Before the Wayfair decision in June 2018, Quill served as the precedent for sales tax nexus. Under Quill, businesses had to have a physical presence (e.g., office, store, warehouse, employees, independent contractors, inventory storage, etc.) in the state before the state could require the business to collect and remit sales tax. 

Wayfair has replaced Quill as the standard for how nexus is established.  Physical presence is no longer required.   In Wayfair, South Dakota convinced the court to expand its authority to impose sales tax obligations on out of state businesses based on an “economic” threshold.

What does “Economic Nexus” mean?

The Wayfair decision means that states are now free to impose a sales tax obligation on a remote seller based on the economic activity within their state.  Unlike nexus that’s based on physical presence, economic nexus is based entirely on sales revenue, transaction volume, or a combination of both.

For example, if your business is based in Missouri but you have substantial revenues from customers that live in Arkansas, you have economic nexus in Arkansas.  In this case “substantial” means if your revenues exceed the state’s economic nexus thresholds.  If they do then you are required to collect and remit sales tax from those customers.

What are the thresholds from economic nexus?

State laws on economic nexus vary and this area of law is changing rapidly.   For instance, the South Dakota law that led to the demise of the physical presence rule uses the following thresholds:

• ·         $100,000 in sales of goods or services into the state OR
• ·         200 or more separate transactions

The sales thresholds vary in each state from $10,000 to $500,000 in sales, and some states don’t have a transaction threshold at all.   With 50 states there is a lot to figure out and keep up with.

What types of companies will be impacted by the Wayfair decision?

The decision impacts all businesses selling in other states whether they provide services or tangible goods. The economic nexus thresholds are applied to remote sellers of any kind, not just those online, so states will be looking to identify sellers not based in their state to collect more revenue.

For example, a manufacturer in Missouri could sell its product to five other states through a more traditional sales process. Even though there is no online sales component, the seller will be required to collect sales tax on behalf of all five of those states if the company’s sales meet the economic threshold in those states.

Is Wayfair unfair (or even way unfair)?

No, it is not unfair to online retailers. What was unfair was that online retailers had a competitive advantage over Wal-Mart, Best Buy and other brick-and-mortar retailers based on sales tax nexus. Buy a vacuum online and you paid no sales tax; buy the same vacuum at Wal-Mart and you do pay sales tax. This decision levels the playing field. 

Don’t forget that sales tax is actually your tax obligation as a consumer. An online retailer is not charging you a sales tax. The retailer is merely collecting your tax obligation on your behalf as a fiduciary and remitting it to the sales tax peeps.  Yes our laws don’t trust that we as consumers will record all the transactions and make payment. 

Justice Kennedy wrote the decision in Wayfair, which quotes in part “In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers.” The Court also stated in reference to Amazon surpassing Wal-Mart as the largest retailer, “When it decided Quill, the Court could not have envisioned a world in which the world’s largest retailer would be a remote seller.”

When will the new economic nexus thresholds go into effect?

Enforcement dates vary by state ranging from later 2019 to attempts to even make it retroactive.  If your company has met the thresholds last year in any of these states and you are not collecting sales tax, it’s possible you are already out of compliance and creating a tax liability for your business. 

What are the risks if I do nothing?

If you don’t come into compliance, the sales tax liability that belongs to your customers will become your liability. Unless you are able to document your customer already remitted the tax, states can come after your company as the seller and ultimately liable party for the tax.

My company sells in more than one state.  How do I comply with Wayfair?

The first step is to determine all states you are selling in to see if you have met the economic nexus thresholds of that state.   If you have multi-state sales and feel like you may have some exposure in this area, give us a call and we will get you the help you need! We would be happy to email you a "Post-Wayfair Nexus Activity Roadmap" that will give you the economic nexus thresholds for all 50 states.  😊

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