By the SALTovation Team at TaxOps
By acting on Wayfair in 2018, the Supreme Court justices acknowledged that the rise of online marketplaces has forever changed the way we do business. How state and local governments collect revenue has forever changed with it.
In June of 2018, the U.S. Supreme Court upheld South Dakota’s economic nexus law in South Dakota v. Wayfair, which requires out-of-state sellers with more than 200 transactions or $100,000 in sales into the state to collect and remit sales and use tax. This ruling struck down the 1992 decision the Supreme Court provided in Quill v. North Dakota that found a state could not require an out-of-state seller to collect sales and use tax unless the seller had a physical presence within the state.
The Wayfair decision, however, fell short in defining a clear definition of “substantial nexus,” giving rise to a wide latitude of rules, rates and requirements as states set their own interpretations. The Supreme Court ruling found that substantial nexus does not require physical presence; and South Dakota’s economic nexus law qualifies as substantial nexus. That baseline leaves a lot of room for interpretation.
States moved quickly to write and re-write rules defining nexus in ways that compel out-of-state retailers to collect and remit their state and local sales and use taxes, with varying numbers of transactions and dollar amounts triggering nexus, a combination of one or both, wholesale vs retail, the list goes on. Initially, Kansas elected no threshold at all—a single sale into the state triggered sales and use tax obligations. That no threshold rule changed in 2021*. In addition to physical presence, remote sellers must be vigilant about state nexus rules in determining whether—and when—their in-state activities reach the level of substantial nexus.
These changes have sent sellers in search of software solutions to simplify sales tax compliance and minimize the compliance burden going forward. But automation is not enough to ensure compliance. Automation is only part of the answer—a tool in the toolbox—of a necessary state and local tax solution that should include, at a minimum:
- Locating nexus and a baseline of sales activities that have or could be creating nexus all along due to continued business activity
- Pinpointing taxability of products and services
- Quantifying exposure and reducing risk
- Managing customer set up, exemptions and procurement of proper documentation to attest to exempt status
- Creating a framework for state and local tax compliance
These components together create a comprehensive solution that gives businesses the confidence to move forward without state and local tax issues weighing down strategy.
Read more on nexus here.
Within a year of Wayfair’s passage, all but two of the 45 states and Washington, D.C. that have statewide sales tax policies had implemented a Wayfair-like law. Five states – New Hampshire, Oregon, Montana, Alaska and Delaware, collectively referred to as the N.O.M.A.D. – do not impose sales tax, but merchants in some cities in these states might still work to put vendors on the hook to collect local sales taxes.
In the rush to implement nexus laws, consistence was thrown to the wind. States continue today to find new and expanded ways to capitalize on the marketplace shift and capture more tax revenue. In broadening the tax base to digital goods, services, and advertising, to name a few, new sets of rules and rates, effective dates, and transaction and revenue thresholds make enforcement of Wayfair rules uneven and confusing.
Today, the U.S. has over 10,000 taxing jurisdictions, making tax compliance is a tall task. Even small businesses operating in only a few jurisdictions must be vigilant to government notices indicating changes in nexus and the tax base. While automation helps, it is but one part of a compliance strategy for managing state and local tax obligations. Registering for one tax opens the door to additional scrutiny and taxing requirements. Knowing when a threshold is tripped and where to register to collect and remit taxes is an ongoing task.
Reach out to your professional adviser at TaxOps to interpret the sales activity and identify if and when nexus occurs so compliance is within reach.
* On May 3, 2021, the Kansas legislature voted to override Gov. Laura Kelly’s veto of omnibus legislation imposing a sales tax collection and remittance requirement for remote sellers and marketplace facilitators exceeding a $100,000 sales threshold effective July 1, 2021, thus, now Kansas has a minimum threshold of $100,000 of sales into the state before economic nexus applies. For more information on Wayfair in Kansas, see this post from Grant Thornton.