Sales Tax Update: South Dakota v. Wayfair
Posted July 4, 2018
The United States Supreme Court in a 5-4 decision (aren’t they all 5-4 decisions, usually along party lines?) in South Dakota v. Wayfair (full opinion), the sales tax nexus landscape changed dramatically. Until then, Amazon retailers and other online resellers were partially safe as a result of the 1992 Quill v. North Dakota decision where the Court required nexus through physical presence before states could demand sales tax collection.
We say partially safe since FBA (fulfilled by Amazon) online retailers have sales tax nexus based on the physical presence of Amazon warehouses. Fruit of the poisonous tree stuff. One month your inventory is in California being sold to California customers, and as such you needed to collect sales tax. Next month, your inventory is in Nevada being sold to the same California customers, and now you don’t have a physical presence and therefore do not need to collect sales tax.
That way of thinking remains, but the Wayfair decision paves the way for the states to define nexus differently allowing them to collect sales tax from outsiders.
As a side note, are we the only ones who thought we gave the Dakotas to Canada… like a two-for-one deal? Instead, North and South Dakota are the crown jewels in landmark sales tax decisions… 1992 and now 2018. 1992… back when Baby Got Back by Sir Mix A Lot and End of the Road by Boyz II Men were number ones! We still crack up at the “LA face with an Oakland booty” lyric. The internet was also an infant being primarily an email mechanism and some light research conduits- eCommerce did not exist as we know it today.
Sales Tax Nexus
Sales tax nexus, from the Quill case, was defined as physical presence, which in itself has been defined and redefined by states in an attempt to enforce nexus on certain businesses. But with Wayfair, the Court changed this to “substantial nexus.” So, they’ve made it subjective in a sense and they’ve changed presence to nexus, which is more abstract and fuzzy. This was intentional to give states wide latitude in shaping their own worlds. For example, South Dakota defines substantial nexus as-
- Sell more than $100,000 in a year
- Have 200 or more separate transactions for the delivery of goods or services
We commonly call these numeric thresholds “bright line” definitions, or in this application bright line nexus. Trip this wire, boom, sales tax.
Is this Way Unfair?
Nice play on words, huh?! Wayfair, Wayunfair. Whatever… we think it’s funny. Short answer, No, it is not unfair to online retailers. What was unfair was that online retailers had a competitive advantage over Wal-Mart, Best Buy and other brick-and-mortar retailers based on sales tax nexus. Buy a vacuum online, no sales tax. Buy the same vacuum at Wal-Mart, sales tax. We believe in free enterprise provided the playing fields are level.
Don’t forget that sales tax is actually your tax obligation as a consumer. An online retailer is not charging you a sales tax. The retailer is merely collecting your tax obligation on your behalf as a fiduciary and remitting it to the sales tax peeps. Yeah, our laws don’t trust that we as consumers will record all the transactions and make payment.
Justice Kennedy wrote the decision in Wayfair, which quotes in part, “In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers.” The Court also stated in reference to Amazon surpassing Wal-Mart as the largest retailer, “When it decided Quill, the Court could not have envisioned a world in which the world’s largest retailer would be a remote seller.”
Wayfair and Wayunfair, hopefully state and local governments can fix some of those darn potholes.
Sales Tax Consultants
The Watson CPA Group refers clients to Avalara and TaxJar.com for their sales tax calculation and remittance needs. TaxJar.com is one of the new kids on the block, and does a wonderful job implementing sales tax collection systems. Avalara is old and established, and they also wrote one of the best articles on the Amazon sales tax issue. While it is now outdated due to the Wayfair v. North Dakota case, it is a good read nonetheless-
Sales Tax Amnesty
What do you do if you are an online reseller and you’ve determined that you should have been collecting sales tax, but failed to do so. The penalties for non-compliance are steep and the statute of limitations in most states is virtually unlimited. We’ve seen businesses file bankruptcy because of a sales tax bill. Recall that when you pay $5 for a drink, the bar is indirectly charging you sales tax- you don’t see it or feel it, but they determine the selling price (let’s say $4.83) by backing out the sales tax obligation. In other words, just because they didn’t collect a sales tax per se doesn’t mean they (you) don’t have a sales tax obligation.
We attended a lecture from Peisner Johnson, who is a sales tax consulting firm established in 1992 (ironically the same year as Quill). They introduced the benefits and pitfalls of the Multi-state Tax Commission (MTC)’s position on sales tax. Certain states got together and basically said, “if you come clean we’ll only slap your wrist. If we find out on our own, you’re getting spanked hard.” Here is the slide deck from that presentation. Enjoy-
Jason Watson, CPA is the Managing Partner of the Watson CPA Group, a business consultation and tax preparation firm, and is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps which is available online.