FAQs on the Wayfair e-Commerce Decision
July 12, 2018
By Gary Bingel
Q. Since the Supreme Court did away with the physical presence test, what did they replace it with?
A. Unfortunately, in doing away with the physical presence test, the Supreme Court failed to replace it with any sort of bright-line test. Instead, the relevant question is merely whether the tax in question applies to an activity with a substantial nexus with the taxing state. This nexus can be established when a taxpayer avails itself of the substantial privilege of carrying on business in the jurisdiction in question. All that needs to be shown is that there were sufficient economic and virtual contacts, such as through having $100,000 in sales or 200 transactions in the taxing state.
Q. What are the new economic nexus thresholds?
A. Each state may have different thresholds, although the minimum thresholds that were approved by the Supreme Court were South Dakota’s of $100,000 in sales or 200 transactions. Some states have higher thresholds (e.g., $250,000 in sales) and not all may have a transaction number threshold. Some states also have additional requirements such as “systematic solicitation.” We expect most, if not all, states that enact legislation after the Wayfair decision, or that feel their current provisions encompass economic nexus, to adhere to the South Dakota thresholds. However, each state should be reviewed individually for specific thresholds and how they may be implemented.
Q. How are the new thresholds calculated?
A. Each state may calculate somewhat differently and should be reviewed individually. Many of the states use the prior calendar year or the current year to measure the threshold. Thus, if you meet the requirement in one year, you may be deemed to have nexus the following year, too. Many of the states’ thresholds reference taxable sales or retail sales, as opposed to gross or total sales. However, not all appear to have this reference. While having only exempt sales that meet the applicable threshold may not create nexus in some states, it is not clear this is the case in all states. Some companies may have nexus and a filing requirement despite having taxable sales under the threshold amounts. We are hopeful that states will begin to release guidance on this matter in the future to help provide clarity. For those instances where you meet the applicable thresholds during the year, it is unclear whether you will be required to go back and collect or remit tax for the portion of the year before the thresholds were met. We are hopeful that in these instances the collection responsibilities will only be enforced for the portion of the year subsequent to when the threshold is met.
Q. If you meet these economic thresholds in one year and don’t in the following year, are you still deemed to have nexus?
A. Many state provisions reference the prior calendar year as a measuring period. Thus, if you meet these applicable thresholds in one year, you may nevertheless be deemed to have nexus in the following year, regardless of whether you meet the thresholds in the subsequent year.
Q. How many states currently have sales tax economic nexus provisions?
A. Currently, approximately 23 states have some sort of economic nexus provision in writing, although some of these do not take effect until January 1, 2019. Since more than 40 jurisdictions asked the Supreme Court to revoke the physical presence requirement, we expect that all states with a sales tax will be applying economic nexus to sales taxes shortly. Several states are taking the position that their current nexus provisions are broad enough to encompass economic nexus and they do not need to enact specific legislation.
Q. Are all states’ provisions the same?
A. No. These economic nexus provisions vary by state, and each state should be reviewed individually. Many of the states use the prior calendar year or the current year to measure the threshold. Many of the states’ thresholds reference taxable sales or retail sales, as opposed to gross or total sales. Also, the threshold amounts may differ by state, or a state may have additional requirements necessary to create nexus.
Q. How do you expect states to react to this ruling, especially major states where e-commerce vendors have been so pivotal?
A. We expect all states with a sales tax to enforce some type of economic nexus provision in the near future, although each state will have its own nuances. States that have been major e-commerce hubs will likely follow this trend as well. Several states are taking the position that their current nexus provisions are broad enough to encompass economic nexus, and they do not need to enact specific legislation.
Q. How are samples, promotional items and free trials treated?
A. This remains to be determined. Generally, samples upon which tax has not been paid are subject to use tax. If each sample or free trial that is given away is deemed a separate transaction, a company could possibly create sales tax nexus by distributing enough samples in a state to meet the applicable transactional threshold and then owe use tax on the samples in the state where the sample or free trial was received.
Q. How does the Wayfair decision impact taxes other than sales taxes?
A. This is unclear at this time. Since the Quill decision, the physical presence requirement was generally held to be unique to sales taxes, and economic nexus provisions for income taxes have been around for years. We believe the Wayfair decision will further embolden states to enforce economic nexus for other types of taxes, (e.g., income and net worth taxes). The lack of retroactive enforcement was a consideration in Wayfair, and many states have informally stated they will only seek to enforce its holding prospectively. States may be less compelled to waive retroactive application for other types of taxes.
Q. What is the effective date for implementing this decision?
A. This is an open question. Some states’ provisions take effect as of a specific date, such as January 1, 2019. Other provisions are effective upon a final decision of the Supreme Court. Since Wayfair was remanded to the South Dakota Supreme Court, it does not appear that this decision is final. Also, other issues could be raised on remand. It does not appear that there are any serious issues that will materially change the decision as it currently stands, and it is likely there will a final decision before the end of 2018. Businesses that will be materially impacted by this matter should begin evaluating such impacts and appropriate courses of action as soon as possible.
Q. What industries are impacted by this decision?
A. Any company with interstate sales. Even businesses whose sales are exempt may now be required to collect and track exemption certificates in additional states. Those industries that will likely be hardest hit include those with internet sales/e-commerce components, as well as industries that deliver their products electronically, such as the technology industry (e.g., software, gaming, etc.). Service companies may also be impacted, as items such as information services are generally deemed to be sold in the state where the user resides.
Q. Everything we sell is exempt (e.g., for resale). Does this still impact us?
A. Companies whose sales are generally all exempt may nevertheless still be impacted by this decision. Depending on states’ economic nexus provisions, these companies may need to collect and track exemption certificates in additional states. Also, businesses need to remember that taxability of items varies from state to state. What is an exempt sale in one state may be taxable in another state.
Q. What should businesses be doing now?
A. They should be taking several steps, including:
- Evaluating whether and how this decision may impact them.
- To the extent additional filings will be necessary, they should (1) evaluate whether their current systems can provide the additional information that may be necessary; (2) determine if they need additional software, such as rates packages, returns software, etc.; (3) establish who will be responsible for the additional filings? If done in-house, will additional personnel be required? In addition to the filings, there may be registrations, audits, notices, etc. If you will outsource, what level of assistance do you need? (4) examine whether there are areas or processes that can be automated.
- Before registering for sales taxes in additional states, consider (1) that in order to register for sales tax, you likely need to first register with the secretary of state and designate an agent for in-state service of process, all of which may require additional fees/costs; (2) if there is exposure that needs to first be remediated, such as due to prior physical presence that was ignored or deemed a low risk. (3) whether you will be liable for additional taxes such as income or net worth taxes.
Q. Are there systems out there that can handle all the rates, returns and so forth?
A. There are several software companies that offer rates packages, which could possibly be integrated with your current systems. Before purchasing such software, consider the level of assistance you need. If you just need a rates package or your systems are fairly simple (e.g., one invoicing system as opposed to multiple systems) and you have the staff to handle ancillary tasks such as reconciliations, journal entries and notices, a software solution may be all you need. If you lack the proper staffing or need help with items such as taxability decisions and/or audit defense, you may need more than a simple software package. In this case, you may want to look for more of a professional services outsourcing solution.