On June 21, after hearing the arguments on both sides of the South Dakota v. Wayfair case, the U.S. Supreme Court issued a monumental ruling in favor of South Dakota. Today, many business owners are questioning how sales across state lines will impact their bottom lines.
To understand the impact of this decision, you have to throw out everything you thought you knew about a business’s physical presence in a state. Now, state legislators can require businesses that sell more than $100,000 worth of goods or services into a state in a year or complete 200 or more transactions into their state over a 12-month period, to register with the state and comply with their state’s tax laws. This new rule doesn’t just apply to online retailers either. All businesses that sell into states that have adopted the new regulations will be impacted.
Some legislators have even said a business’s online presence might be enough to establish nexus in a state. For example, if a resident of a state visits your website and you track their visit with cookies, the state could argue that the cookie is enough of a physical presence to result in nexus. Additionally, if you generate click referrals to your business’s website by placing online ads that target residents in a particular state, the ad is equivalent to having physical presence in a state.
Using a third party to sell your products won’t work either. States have said that if a business uses a third party, such as Amazon, and the third party stores your company’s inventory in another state, you would be held to the same sales taxes as the third-party seller.
What Else Do You Need To Know?
- Though states can constitutionally impose this rule, they still have to have a law on their books to do so. Most states already include some language asserting that you have nexus “to the extent permitted by the U.S. Constitution” or similar language. Even without a specific Wayfair law, most states could argue that their law, as it is today, permits this treatment.
- Companies that obviously have nexus but choose not to register or collect sales tax in other states may need to include financial statement disclosures in their audited financial statements.
Immediate Considerations
- Consider your risk in each state you do business in. Ask yourself, if you were to register or be caught by the state, what would be the result?
- If you primarily sell to wholesalers, keep good exemption certificate records. This way, registering with the state might just be an administrative issue. You may have to go through the process of defending the audit, but as long as your documentation is good, that might be it.
- If you sell to end users, find out if your product or service is taxable in each state you do business in.
- Break out your invoice price to contain the risk associated with things that are actually taxable (many states fully tax mixed transactions).
- Determine if your customers have an exemption for their use of your product or service in their state. If so, keep good records of exemption certificates.
- Make sure your software can accurately report sales by state, county, etc. Know if you are sourcing sales in accordance with each state’s rules on sourcing, and if your software can handle taxable and nontaxable sales.
- In states where risk is high, ascertain whether you should register going forward, pursue a voluntary disclosure or simply wait and see what happens. If you choose not to take action in states where you have nexus under Wayfair, determine whether your auditing team will be required to add a disclosure to your financial statement or if you need to consider an accrual for sales tax.
It’s especially important to take time to assess your business’s specific situation and tailor a plan with your tax advisors to minimize risk and put you in the best position for continued success.
Rea’s state and local tax team can highlight areas of exposure and help you define an action plan of items to address immediately while identifying what can be implemented over time.
By Joseph Popp, JD, LLM (Dublin Office)