South Dakota v. Wayfair Outcome- Do I have to collect sales tax now?

Tuesday, June 26th, 2018

 
 
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McMinnville OR, June 26th - South Dakota v. Wayfair Outcome: Do I Have to Collect Sales Tax Now? Let's see if we can get you an answer or give you enough information to get an answer on your own. In order to do this, we need to cover some background information as simply as possible. There are words (terms) in this article that may be new to you - they are defined to make life easier. All that said, this is "tax stuff," so put a smile on your face and let's get to it.

Important Background Information

What is Nexus?

Sounds like something cool out of a movie, but it is not movie stuff. The word "nexus" simply means a link or connection between two or more things. When you used your computer to read this article, your fingers had nexus with your keyboard and mouse. They were connected. They had nexus with one another.

What is "Sales Tax" Nexus?

For sales tax, nexus has a slightly different meaning and is often referred to as "sales tax nexus." "Sales tax nexus" means that a company is connected to a state and because of that connection, a company:

  1. Must register to collect and pay sales tax,
  2. Must follow that state's sales and use tax rules on its sales in that state, and
  3. Must collect and remit sales tax to that state on taxable sales.

In short, it means that you have to collect tax, fill out a tax return, and send the collected tax to a state.

Collecting Sales Tax ("Filing Obligation")

When a company has "sales tax nexus," that company has what is commonly called a "filing obligation." A "filing obligation" simply means that you must file sales tax returns.

Old Rule: "Substantial Nexus" with a "Physical Presence" Requirement

What was the "Old" Rule (before South Dakota v. Wayfair)?

The old rule was: If a company has "substantial nexus" with a state, then it has sales tax nexus and a filing obligation. So what did "substantial nexus" mean under the old rule?

Under the "old" rule, "substantial nexus" meant that a company had to have a physical presence in a state, like an employee or property.

A company had a "physical presence" in a state if a company:

  1. Owned property in the state (had a store or some other physical property), or
  2. Had employees in the state.

Over the years, states added a lot more ways for a company to be physically present. For example, states provided that having agents, delivery trucks, sales representatives, computer servers, leased property, and many additional activities within the state meant that a company was physically present in the state.

LEGAL HISTORY of OLD RULE: The "physical presence" test was created in 1992 by the Supreme Court in Quill v. North Dakota. In Quill, the Supreme Court decided that a state could not require an out-of-state company to collect sales tax unless the company had "substantial nexus" with the state. In Quill, the Court explained that "substantial nexus" meant that a company had to have a physical presence in a state, like an employee or property.

"New" Rule: Substantial Nexus without a Physical Presence Requirement

What is the "New" Rule (after South Dakota v. Wayfair)?

"New" Rule: If a company has "substantial nexus" in a state, then a company has sales tax nexus and a filing obligation with that state.

Under the "new" rule a state cannot require an out-of-state company to collect sales tax unless a company has a "substantial nexus" with a state. Yes, this sounds identical to the old rule in 1992 (and it nearly is identical), but there is one very important change - "substantial nexus" no longer requires that a company be physically present in a state. The Supreme Court removed the "physical presence" requirement from the definition of "substantial nexus" as part of its decision in South Dakota v. Wayfair.

So the "new" rule is not so much a new rule as it is the old rule with the "physical presence" requirement removed. It is also important to note that the "physical presence" alone may not mean that a company has "substantial nexus."

So what is "substantial nexus" and when does a company have it?

What is Substantial Nexus Now?

The Supreme Court defined "substantial nexus" to mean that a company uses or takes advantage of the substantial privilege of carrying on business in a state.

When Does a Company Have Substantial Nexus?

A company has "substantial nexus" when it uses or takes advantage of the substantial privilege of carrying on business in a state. Here are two examples of when a company would have "substantial nexus" with a state under the new rule:

Example 1: A company that sells into a state more than $100,000 in a year would have "substantial nexus."

Example 2: A company that has 200 or more separate transactions for the delivery of goods or services into the state in a year would have "substantial nexus."

In both of the above examples, a company would have "substantial nexus" and a state could now require an out-of-state company to collect sales tax. Please note that the above examples are examples and not meant to be the only examples of when a company has "substantial nexus."

Another thing to keep in mind is something the Supreme Court mentioned in its recent Wayfair decision. The Court was careful to point out that South Dakota had three special protections for out-of-state merchants:

  1. South Dakota's economic nexus rule did not apply to businesses that transacted only limited business in South Dakota.
  2. South Dakota's economic nexus rule did not apply "retroactively" (in other words, it did not apply to transactions that took place before the state's economic nexus rule existed).
  3. South Dakota adopted the Streamlined Sales and Use Tax Agreement, a uniform model law.

What is the importance of the Court mentioning these three things? It may mean that the Court is sending a message to states asserting economic nexus that they should also have similar protections in place.

Do I have to Collect Sales Tax Now?

South Dakota

South Dakota has a law that clearly explains when a company has nexus and has to collect sales tax. In South Dakota, when a company sells more than $100,000 or has 200 or more separate transactions for the delivery of goods and services into South Dakota in a year, then a company has sales tax nexus and must collect sales tax now. The Supreme Court decided that this law is a valid way to decide when a company has to collect sales tax in a state.

Other States with South Dakota-Like Laws

Tax experts refer to South Dakota's law as an "economic nexus" law. Simply put, the focus of the law is on the economic/sales/business activity of a company and not a company's physical presence. There are several other states that have "economic nexus" laws in place. These states include Alabama, Arizona, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, Rhode Island, Tennessee, Vermont, Washington, and Wyoming.

It is important to note that these other state laws have not been reviewed by the Supreme Court. While that does not mean they are invalid, it does mean that their laws may be close enough to the South Dakota law to be valid, or too far away.

Alabama - $250,000 or more in sales in a year.

Arizona - $100,000 or more in sales in a year.

Georgia - Effective Jan. 2019 - $250,000 or more in sales in a year or 200 or more separate transactions in a year.

Hawaii - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Indiana - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Illinois - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Kentucky - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Louisiana - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Maine - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Massachusetts - 100 or more separate transactions that generate $500,000 or more in sales in a year.

Mississippi - $250,000 or more in sales in a year.

Rhode Island - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

South Dakota - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Tennessee - $500,000 or more in sales in the prior 12 months. Note that Tennessee's nexus law still has to be approved by the legislature.

Vermont - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Washington - $10,000 or more in sales in the prior 12 months. (B&O Tax is $285,000 or more in 2018).

Wyoming - $100,000 or more in sales in a year or 200 or more separate transactions in a year.

Most of the states listed above have "economic nexus" laws very similar to South Dakota's law that the Supreme Court found was valid. Some states are different. Alabama's "economic nexus" law requires a company to collect sales tax if they make more than $250,000 in sales within a year. This would appear to be valid because it is so similar to the law in South Dakota. Washington's "economic nexus" law requires a company to collect sales tax if they make more than $10,000 in sales within a year. This dollar amount is much smaller than the one in South Dakota and might be challenged by companies.

Other States Not Mentioned Above

What about states that do not have "economic nexus" rules or laws? If you want to be conservative, then look at your economic activity across all states. If your company sells more than $100,000 or has 200 or more separate transactions for the delivery of goods and services into a state, then your company is very likely required to collect sales tax now.

If you are not sure or have questions, please contact a tax expert.

So, Do You Have to Collect Sales Tax Now?

In South Dakota, the answer is clear. If your company sells more than $100,000 or has 200 or more separate transactions for the delivery of goods and services into South Dakota in a year, then your company must collect sales tax now.

In other states with laws similar or identical to South Dakota - the answer is also clear - If your company sells more than $100,000 or has 200 or more separate transactions for the delivery of goods and services into those states in a year, then your company must collect sales tax now.

In other states without laws similar to South Dakota - follow the law (if it exists) and contact a tax expert if there is no law or you are not sure whether your business activities fall within the law.

https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf

Who Wrote This - Who is TTR?

TTR is the tax company that explains things simply.

  • TTR is the nation's leading provider of tax answers and tax rates (at the street address level of accuracy).
  • TTR provides the most accurate and comprehensive out-of-the-box solutions for companies that need to collect sales tax.
  • TTR provides tax answers to over 10,000 companies, 70% of Fortune 500 companies, 80% of the largest consulting firms, over 20 state governments, and many universities.
  • TTR has the nation's only Artificial Intelligence (A.I.) enabled exemption certificate management system.
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TTR is a team of tax experts that love their work and love helping companies get tax right. TTR has been ranked as the #1 or #2 Best Place to Work in all of Oregon in 2016, 2017, and 2018 (and yes, we are a tax company). Our 100 professionals really do love what they do. TTR maintains millions (not a joke) of tax answers and tax rates across every industry, for every transaction, everywhere. TTR is located in the heart of Oregon's wine country in McMinnville, Oregon. We'd love to hear from you.

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