The historic South Dakota v. Wayfair case has essentially granted all states the authority to impose sales and use tax on businesses using an economic standard basis. With this decision, even if your business never steps foot in a state, it could become subject to sales tax based on its amount of sales or number of transactions in that state. Even for those businesses that ship by common carrier, these businesses now have potential sales tax to collect. For many years, businesses were only subject to sales tax based on the physical presence standard due to a ruling in the case, Quill Corp v. North Dakota (1992). Within this case, the Supreme Court held that physical presence was a necessary prerequisite for sales tax imposition due to the Commerce Clause, an obligation in the constitution that state legislation cannot burden interstate commerce. Twenty years later, Quill was overturned in South Dakota v. Wayfair, Inc. Not only did the Supreme Court disagree with the 1992 Quill decision, it stated that the physical presence rule “is an incorrect interpretation of the Commerce Clause” (extracted from Supreme Court of the United States Syllabus on South Dakota v. Wayfair, Inc., et al. October term, 2017). South Dakota’s sales tax legislation regarding economic presence was upheld.
The problem with this ruling is that it isn’t just applicable to South Dakota. Many states, if not all, are issuing new legislation (or emergency legislation in some cases) to incorporate this economic presence standard. What’s more problematic is that each state is drafting its own set of rules with different enforcement dates. South Dakota’s economic presence standard is enforceable as of November 1,, 2018 and provides that nexus is met if a business has more than $100,000 of gross receipts or 200 transactions in South Dakota. On the other hand, Pennsylvania is enacting a $10,000 sales threshold with no transaction threshold as of April 1, 2018.
The economic nexus rules are going to place a significant burden on businesses with remote sales. Going forward businesses need to track in each state, gross revenue, number of transaction, tax rates, local sales tax obligations, enforcement dates, etc. Once a business determines it has met a threshold, it will be required to register with the state, collect sales tax, and file sales and use tax returns. Many professionals fear the ruling on sales tax will eventually translate to income tax obligations. While there is much uncertainty in this post-Wayfair world, there is a definitive heightened need for businesses to operate with strong record-keeping, scrutiny, and compliance as a result of the new economic nexus standards. Contact MKS&H today for help navigating your sales tax obligations.