Sales Tax and Wayfair – What Does it Mean for Your Business?

By Karen Poist, CPA and Kim Tarnakow, CPA

On June 21, 2018, the Supreme Court issued its decision on the South Dakota v. Wayfair, Inc. case (Wayfair). This is a major ruling in the sales tax area. What does Wayfair mean to the business owner? Below is some key information on the Wayfair case, what it may mean for your business and action steps that can be taken now.

What did Wayfair change regarding sales tax filing requirements?

 Prior to Wayfair, a state was only allowed to require a business to assess, collect and remit sales tax if sufficient “nexus” or “connection” existed between a business and a state. A connection was generally established by a business having a physical presence in a state, such as an employee, a salesperson, the delivery of products in company vehicles, the installation of products, the providing of services, etc. Once physical presence was established, the business was required to register for, assess, collect and remit sales tax to the state and local jurisdictions, if applicable.

E-commerce has created many challenges for the states and their current sales tax laws. Keep in mind that the laws were established based on a Supreme Court ruling long before the Internet was prevalent. The physical presence standard has now become obsolete. Brick-and-mortar stores are losing sales to online retailers (known as remote sellers) as these remote sellers may not be required to assess, collect and remit sales tax on their sales. Consumers are taking advantage of the “sales tax free” sale on the Internet, even though the consumer is required to self-assess and pay use tax. Thus, state and local jurisdictions are losing the sales and use tax dollars that remote sellers are not required to assess and consumers are not self-assessing.

To capture these lost sales and use tax dollars, many states, including South Dakota, have enacted economic presence nexus statutes. These statutes are based on the premise that if a business is benefiting from a market in a state, whether or not there is a physical presence in the state, the business should assess, collect and remit sales tax to that state. There is great difficulty in determining when a business is benefiting from a state. Some states have implemented threshold standards as evidence of economic nexus. This provides a bright-line test for remote sellers to assess, collect and remit sales tax.  The new economic nexus standard did not agree with the prior Supreme Court precedence of the physical presence standard and therefore the Supreme Court had to rule on the new nexus standard, hence, Wayfair. It should be noted that the economic nexus standard applies to remote sellers without a physical presence in a state. If your business has a physical presence in a state, the business more than likely already has sales tax nexus.

What are the thresholds that create economic sales tax nexus?

The thresholds that establish economic sales tax nexus vary by state. Most states are adopting thresholds that are tied to sales dollars or to a number of separate sales transactions. Many states have chosen $100,000 in sales or 200 separate transactions in a 12-month period (or based on prior year sales activity). More states are expected to adopt economic nexus standards and states with statutes in place continue to add and issue additional guidance. Many questions still remain unanswered. Is a business that exceeds a state’s economic nexus threshold in one year but does not in the subsequent year still required to assess, collect and remit sales tax to that state? It appears so. Businesses with remote sales that are below the economic nexus thresholds need to be aware that they may have other state reporting requirements. A few states are implementing mandatory sales reporting to gather information of sales to consumers for which sales tax had not been assessed by the seller. The purpose of this reporting is to increase the self-assessment and collection of use tax by consumers.

A current list of sales tax economic nexus thresholds is listed in the table below.

 

State (Effective Date) Economic Nexus Thresholds Enforcement Date (if available)
Alabama (1/1/16) $250,000 of in-state sales 10/1/2018
Connecticut (12/1/18) 200 transactions or $250,000 of in-state sales 9/30/2018
Georgia (1/1/19) 200 transactions or $250,000 of in-state sales
Hawaii (7/1/18) 200 transactions or $100,000 of in-state sales
Illinois (10/1/18) 200 transactions or $100,000 of in-state sales
Indiana (7/1/17) 200 transactions or $100,000 of in-state sales
Iowa (1/1/19) 200 transactions or $100,000 of in-state sales
Kentucky (7/1/18) 200 transactions or $100,000 of in-state sales
Louisiana (contingent on Wayfair) 200 transactions or $100,000 of in-state sales 7/1/2018
Maine (10/1/17) 200 transactions or $100,000 of in-state sales
Minnesota (contingent on Wayfair) 100 transactions or $100,000 of in-state sales in at least 10 transactions
Mississippi (12/1/17) $250,000 of in-state sales
North Dakota (contingent on Wayfair) 200 transactions or $100,000 of in-state sales 10/1/2018
Oklahoma (7/1/18) $10,000 of in-state sales
Pennsylvania (3/1/18) $10,000 of in-state sales
Rhode Island (8/17/17) 200 transactions or $100,000 of in-state sales
South Dakota (contingent on Wayfair) 200 transactions or $100,000 of in-state sales
Tennessee (on hold due to pending litigation) $500,000 of in-state sales
Vermont (7/1/17) 200 transactions or $100,000 of in-state sales
Washington (7/1/17) $10,000 of in-state sales
Wyoming (7/1/17) 200 transactions or $100,000 of in-state sales
Note:  Subject to change as additional guidance is issued.

 

What does Wayfair mean to your business?

If your business is currently selling products (and in some cases, services) without having a physical presence in a state, then your business may now be required to assess, collect and remit sales tax to that state.  If your business has exceeded the minimum economic threshold standards, then you must understand the appropriate sales taxability of your products or services and have your accounting systems in place to assess, collect and remit sales tax on applicable sales.

What steps should be taken now to prepare for Wayfair?

 Some states are implementing the economic nexus sales tax filing requirements on remote sellers October 1, 2018, while others are waiting until January 1, 2019. Many states have not provided details as to when enforcement will start. Now is the time to prepare for Wayfair.

Here are a few steps that can be taken now to prepare for Wayfair:

  • Communicate to relevant parties that the company may be subject to additional sales tax assessment, collecting and reporting responsibilities, based on Wayfair. This may include customers, CFO, Legal, IT, Customer Support, A/R, A/P, etc.
  • Review current accounting/billing systems to determine if it has the capabilities to provide the information to determine sales and transactions by state.
  • Look over your current sales tax reporting systems to determine if it has the capabilities to handle the potential increased filing and reporting requirements.
  • Determine the amount of sales and number of transactions by state for 2017 and YTD 2018. States are looking at both the prior year and the current year to determine if economic nexus thresholds have been met and exceeded.
  • Once a determination is made that the business is subject to filing requirements in a new state, understand the laws of the state and how your products or services will be taxed by the state and localities.

The Wayfair case can seem overwhelming for many businesses, but the best approach is to be proactive and address it now rather than later. The BMSS SALT Services Group is available to help you and your business and to provide you peace of mind. Please contact Karen Poist or Kim Tarnakow at
1 (833) CPA-BMSS for additional information or with any questions.