Memo
To: VA Tax Files / VA Clients
From: Peter V. DeGregori, CPA MST CGMA
Date: June 28, 2018
Re: Change in Sales Tax: Supreme Court Ruling for South Dakota v. Wayfair
Summary:
On June 21, 2018, the U.S. Supreme court issued a decision in South Dakota v. Wayfair, overturning the physical presence standard explained in Quill v. North Dakota (Sup Ct 1992) 504 U.S. 298, and other related cases. Prior to this ruling, the Quill case was an important case, which required a physical presence standard for a company to be subject to sales tax if they sold tangible property (typically items you can touch). In general, the “physical presence” standard is a requirement for a company to be subject to sales tax. This law became a common case / item to review if an out of state company was subject to sales tax in another state.
As an example, if you have a company, located only in Florida, then generally that company would only be subject to sales tax in Florida based on sales to Florida consumers. However, if the company shipped products into other states, then they generally they would not be subject to other states’ sales tax if they didn’t have any physical presence in that other state. So, the outcome would be products sold outside of Florida didn’t have sales tax applied against them and this is the issue that has soured the change of this law. If a business wasn’t subject to sales tax, then typically the consumer is responsible to pay use tax to their state. But most consumers do not pay use tax, so the states want a method to subject out of state businesses to sales tax and this new court case has now removed the hurdle of the Quill doctrine. States want more sales tax revenue, and they have been trying hard to collect sales tax from out of state businesses for a long time. Now the law has changed based on this court case and states are going to be able to charge sales tax based on where the consumer resides regardless of “physical presence”.
Now, let’s look at what is meant by “physical presence”. First, this is a generalization, as each state may, unfortunately, have a different set of guidelines, in general, physical presence means that the company had property (fixed assets, inventory, etc.), people, or some other physical connection in a state to subject them to sales tax. So, this was the concern based on the example above, the company in FL could sell products to every other state and wouldn’t be subject to sales tax in any state other than FL. This created an unfair playing field with companies in states in which out of state resellers sold into. So, the US Supreme Court changed the law and now companies are subject to sales tax based on revenue that is generated from a state which is also called “economic nexus”.
Now this is a BIG change for business that sell products to multiple states. Typically, this is going to affect internet companies but will also affect companies as in my example above. Most states have not updated their laws to adjust for this Supreme Court ruling, but we are assuming they will soon, as this only allows the states to generate more revenue.
If we look at the current laws, about 29 states have an “economic nexus” already on the books. So, with this Supreme Court ruling, sales tax would be owed to the state in which an out-of-state company generated an “economic” benefit from. What is economic benefit? It is typically a generation of revenue or sales. So, based on my example, if the FL company sold products into other states and those states have an “economic nexus” law, the FL company now needs to be concerned with registering in that state and begin charging, collecting and remitting sales tax. I know it is a pain, but companies need to follow the laws as those states are allocating resources to find out of state companies that owe them money.
Any good news? Well, yes. Most states currently have a revenue or quantity threshold to exempt small businesses. However, the states define small business differently. For example, most states are not going to require an out of state retailer with only “economic nexus” to be subject to their sales tax if their gross sales in that state are under $100,000 and less than 200 transactions. This is what is deemed to be the small business exclusion. However, some other states have a threshold of $250,000 and 200 transactions, but the state of Washington currently has a threshold of $10,000. Most of these threshold tests are based on prior year sales. Be careful, please review the current law with us or your tax advisor to make sure you are applying the law correctly.
Based on the Supreme Court ruling, we would expect states to update their “economic nexus” laws and create one if they don’t have one. So, a retailer should first look at sales by state for the prior year, and then work with us or their tax advisor to determine which state(s) the company is generating revenue from and those states have economic nexus rules. These rules should not be ignored as most states have stiff penalties, and if needed, the state will have their department of justice file a lawsuit against the out of state business that they feel owe sales tax.
Actions to Consider:
If you are a retailer of tangible products, and you sell into multiple states, and you do not pay sales tax in those states, run a sales report by state for the prior year, and review the economic nexus rules by state with your tax advisor. Contact us to work with you to minimize the headache.
If you have states in which your company should have been subject to sales tax, and you haven’t been contacted by the state, then consider looking into a voluntary disclosure program (VDP) to request acceptance into the states’ program and hopefully receive the benefit of only having to file sales tax returns for up to three years versus six to eight and be in a position to not have to pay penalties.
Also, if your company sells to resellers, typically you are still required to register and file sales tax returns and show the reduction of taxable sales as they are sold for resale. This does give the state the right to audit you, so make sure you have annual copies of resell certificates.
Unfortunately, sales tax laws are specific to each state and company based on the transactions, so call us to discuss.
Other Considerations:
There are many other items to consider. For example, if a company manufactures, resells and sells to consumers, perhaps there is a benefit to dividing up the company so that the manufacturer activity is separated from the reselling activity. Also, you may need to consider state income tax. So, to comply with these new sales tax rules, make sure you understand other items that may be related like sales tax, state registration, change in your sales software and invoicing, etc.
There is much to think about and Congress could again change the law, but I feel they are too busy with other things, so all one can do is to deal with the current laws, understand them and apply them accordingly. Please contact us at 949-756-8080 or [email protected] if you would like to discuss.
Overview of Economic Nexus as of June 28, 2018
[table]
[tr][th]STATE[/th] [th]ECONOMIC NEXUS[/th] [th]THRESHOLD[/th][/tr]
[center][tr][td]Alabama[/td] [td]Yes.[/td] [td]$250,000[/td][/tr][/center]
[tr][td]Alaska[/td] [td]N/A[/td] [td]N/A[/td][/tr]
[tr][td]Arizona[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Arkansas[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]California[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Colorado[/td] [td]No.[/td] [td]$100,000
*Special Law, ask tax preparer for details[/td][/tr]
[tr][td]Connecticut[/td] [td]Yes.[/td] [td]$250,000 or 200 units[/td][/tr]
[tr][td]District of Columbia[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Delaware[/td] [td]N/A[/td] [td]N/A[/td][/tr]
[tr][td]Florida[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Georgia[/td] [td]Yes.[/td] [td]$250,000 or 200 units[/td][/tr]
[tr][td]Hawaii[/td] [td]Yes. [/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Idaho[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Illinois[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Indiana[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Iowa[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Kansas[/td] [td]N/A[/td] [td]N/A[/td][/tr]
[tr][td]Kentucky[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Louisiana[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Maine[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Maryland[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Massachusetts[/td] [td]Yes.[/td] [td]$500,000 or 100 units[/td][/tr]
[tr][td]Michigan[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Minnesota[/td] [td]No.[/td] [td]Less than $100,000
*Special Law, ask tax preparer for details[/td][/tr]
[tr][td]Mississippi[/td] [td]Yes.[/td] [td]$250,000[/td][/tr]
[tr][td]Missouri[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Montana[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Nebraska[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Nevada[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]New Hampshire[/td] [td]N/A[/td] [td]N/A[/td][/tr]
[tr][td]New Jersey[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]New Mexico[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]New York[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]North Carolina[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]North Dakota[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Ohio[/td] [td]Yes.[/td] [td]$500,000[/td][/tr]
[tr][td]Oklahoma[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Oregon[/td] [td]N/A[/td] [td]N/A[/td][/tr]
[tr][td]Pennsylvania[/td] [td]Yes.[/td] [td]$10,000[/td][/tr]
[tr][td]Rhode Island[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]South Carolina[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]South Dakota[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[tr][td]Tennessee[/td] [td]Yes.[/td] [td]$500,000[/td][/tr]
[tr][td]Texas[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Utah[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Vermont[/td] [td]No.[/td] [td]$100,000 and notify purchasers who bought more than $500
*Special Law, ask tax preparer for details[/td][/tr]
[tr][td]Virginia[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Washington[/td] [td]Yes.[/td] [td]$100,000 in gross receipts or referrers having at least $267,000 in gross income
*Special Law, ask tax preparer for details[/td][/tr]
[tr][td]West Virginia[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Wisconsin[/td] [td]No.[/td] [td]N/A[/td][/tr]
[tr][td]Wyoming[/td] [td]Yes.[/td] [td]$100,000 or 200 units[/td][/tr]
[/table]Note: this is very high level summary and laws do change, so please discuss with us or your tax advisor and we
recommend you review with our tax memo dated 6/28/2018
