Companies Without a Physical Presence Required to Collect Sales Tax

Key Takeaways:

  • South Dakota v. Wayfair, Inc. Ruling: States can require out-of-state sellers without a physical presence to collect sales tax, overturning previous precedents.
  • Economic Nexus Standards Established: Post-Wayfair, states set economic thresholds, defining sales or transactions counts that obligate sellers to collect sales tax.
  • Implications for Out-of-State Sellers: Companies must now evaluate their sales activities in each state to comply with new sales tax laws, reflecting the expanded scope of “economic nexus.”
  • National Adoption and Response: Following the Wayfair decision, all states with a sales tax, except a few holdouts initially, adopted similar economic nexus thresholds to capitalize on this new tax authority.
  • Complex Compliance Landscape: Businesses face a more complex sales tax compliance environment, requiring vigilance in monitoring changes in state tax laws and regulations.

What Happened in South Dakota v. Wayfair, Inc.

On June 21, 2018, the United States Supreme Court ruled in a 5-4 decision in South Dakota v. Wayfair, Inc., et al, that states can generally require an out-of-state seller to collect and remit sales tax on sales to in-state consumers even if the seller has no physical presence in the consumer’s state.  In doing so, the Court overruled 50 years of its own precedent.  The decision allows states to define a sales threshold (either by dollar amount or the number of transactions) which will trigger this collection requirement.

Why Did Wayfair Happen?

Before Wayfair, businesses with no employees or property in a state (i.e., no physical presence) were not considered to have sales tax “nexus” and therefore had no requirement to collect and remit tax on these sales.  Instead, the consumer was responsible for reporting and self-remitting a use tax to the state at the same rate on those purchases – a scenario which unsurprisingly led to fewer tax dollars being collected by the state.  As a result, many state governments asserted that they were being unfairly hindered in their ability to collect taxes on these sales.  Likewise, many in-state taxpayers complained that they were being undercut by out-of-state remote sellers that were not required to collect the same sales taxes they were.

In a move to bring the issue to a head, South Dakota enacted a law in 2016 which required sellers to sell more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state on an annual basis, to collect and remit sales tax on all taxable sales into the state.  Online retailer Wayfair challenged this law as being contrary to established Supreme Court precedent and unconstitutional.  In ruling in favor of South Dakota, the Court held that its prior rulings on the matter, some of which dated back to the mid-1960’s and required the seller to have in-state physical presence before it could be required to collect sales tax, were outdated and effectively caused market distortions with modern technology giving an advantage to e-commerce and out of state retailers over dealers with in-state locations.

Webinar: The Wayfair Case: What is it and Why Should I Care?

What Does the Wayfair Sales Tax Case Mean?

As a result of this landmark decision, states now generally have the right to require out-of-state companies to collect and remit sales tax based on an objective measure of sales and/or transactions (“economic nexus”). Companies that previously relied on the physical presence test to avoid collecting other state’s sales taxes will now need to analyze their sales data to ensure they comply with individual state sales tax laws.

The District of Columbia and the 45 states that impose a sales tax followed the Wayfair case closely and unsurprisingly reacted swiftly and favorably to their newfound authority to tax previously untaxable transactions. As of early 2021, only 3 “holdout” states (Florida, Kansas and Missouri) had yet to enact an economic threshold similar to South Dakota’s although Kansas asserted the authority to tax any taxable sale into the state regardless of the dollar amount. However, Kansas and Florida enacted $100,000 thresholds based on Wayfair during their spring 2021 legislative sessions.  Finally on May 14, 2021, Missouri became the last jurisdiction to enact a Wayfair-type economic nexus threshold.

Clearly, the Wayfair decision has added complexity to compliance with state sales tax laws. In addition to the enactment of the new nexus thresholds that taxpayers must be aware of, some states have subsequently modified their provisions to change the initial dollar threshold (e.g., Tennessee decreased from $500,000 to $100,000) or eliminate the 200 transaction prong altogether (e.g., Kentucky, Louisiana, South Dakota, and Wyoming). Companies will need to proactively monitor and react to state law changes to thresholds, rates, and sourcing guidance.

Compliance and Planning Considerations

  1. Will this affect any non-sales taxes?
    • Will the states apply these type provisions to taxes other than sales taxes?
    • If so, will you be required to file for gross receipts or franchise taxes in addition to sales tax?
  2. Thresholds are determined on an annual basis. However, states have defined the starting point of this basis at different periods (i.e. Prior calendar year, state fiscal year, current calendar year, etc.).
  3. How will the states measure the dollar thresholds?
    • Do the states look to taxable sales only, or do they include all sales?
    • If the latter and your companies mostly sell to resellers, will your company be required to file 0 returns monthly?
  4. How will this affect account payables if vendors are to charge sales tax?
    • If they are not charging sales tax, are there circumstances where my company will need to include purchases for use tax?
  5. Does my company have a process to track and maintain exemption certificates?
  6. How does each state source sales?
  7. Does the state include sales delivered electronically or only for the tangible property?
  8. Does the state require the aggregation of affiliated businesses?
  9. Does my company have the capacity to comply with these changes?
    • Will we need to hire additional resources?
    • Will we need to engage with outside consultants?
    • Will we need to purchase or upgrade ERP systems?

Which States Have Economic Nexus?

When reviewing the new sales tax economic nexus chart to determine the impact on your company, comparing your company’s sales-by-state to the threshold on the chart is just the beginning. The key is to comply without creating unintended consequences. Your company must take the proper steps to address the domino effect of issues created by the new sale tax nexus landscape before your company registers and starts collecting sales tax in new states.  (The thresholds are those currently in effect. These thresholds can and do change. Therefore, taxpayers should always check to make sure these thresholds are still current.)

Wayfair Sales Tax Case: Taxable Transactions Only by State

StateCurrent Economic Activity Nexus Threshold
(Generally based on previous 12-months or calendar year although measurement periods vary)
Enforcement Date
Alabama$250,000 in sales10/1/2018
Alaska *$100,000 in sales or 200 transactions3/1/2020
Arizona$200,000 (2019); $150,000 (2020); $100,000 (2021)10/1/2019
Arkansas$100,000 in sales or 200 transactions7/1/2019
California$500,000 in sales4/1/2019
Colorado$100,000 in sales6/1/2019
Connecticut$100,000 in sales AND 200 transactions12/1/2018
D.C.$100,000 in sales or 200 transactions1/1/2019
DelawareNo Sales TaxN/A
Georgia$250,000 in sales or 200 transactions (2019); $100,000 in sales or 200 transactions (2020)1/1/2019
Hawaii$100,000 in sales or 200 transactions7/1/2018
Illinois$100,000 in sales or 200 transactions10/1/2018
Indiana$100,000 in sales or 200 transactions10/1/2018
Iowa$100,000 in sales1/1/2019
Kansas$100,000 in sales7/1/2021
Kentucky$100,000 in sales or 200 transactions10/1/2018
Louisiana$100,000 in sales or 200 transactions (transactions threshold removed effective August 1, 2023)7/1/2020
Maine$100,000 in sales or 200 transactions (transactions threshold removed effective January 1, 2022)7/1/2018
Maryland$100,000 in sales or 200 transactions10/1/2018
Massachusetts$100,000 in sales10/1/2019
Michigan$100,000 in sales or 200 transactions10/1/2018
Minnesota$100,000 in sales or 200 transactions10/1/2018
Mississippi$250,000 in sales9/1/2018
Missouri$100,000 in sales1/1/2023
MontanaNo Sales TaxN/A
Nebraska$100,000 in sales or 200 transactions1/1/2019
Nevada$100,000 in sales or 200 transactions10/1/2018
New HampshireNo Sales TaxN/A
New Jersey$100,000 in sales or 200 transactions11/1/2018
New Mexico$100,000 in sales7/1/2019
New York$500,000 in sales AND 100 transactions6/21/2018
North Carolina$100,000 in sales or 200 transactions11/1/2018
North Dakota$100,000 in sales10/1/2018
Ohio$100,000 in sales or 200 transactions8/1/2018
Oklahoma$100,000 in sales7/1/2018
OregonNo Sales TaxN/A
Rhode Island$100,000 in sales or 200 transactions8/17/2018
South Carolina$100,000 in sales11/1/2018
South Dakota$100,000 in sales or 200 transactions (transactions threshold removed effective July 1, 2023)11/1/2018
Tennessee$500,000 ($100,000 effective 10/1/2020)10/1/2019
Texas$500,000 in sales10/1/2019
Utah$100,000 in sales or 200 transactions1/1/2019
Vermont$100,000 in sales or 200 transactions7/1/2018
Virginia$100,000 in sales or 200 transactions7/1/2019
Washington$100,000 in sales10/1/2018
West Virginia$100,000 in sales or 200 transactions1/1/2019
Wisconsin$100,000 in sales10/1/2018
Wyoming$100,000 in sales or 200 transactions (transactions threshold removed effective July 1, 2024)2/1/2019

* Alaska does not impose a state sales tax; however, many local governments impose a sales tax with an economic nexus based on statewide sales

This is for informational purposes only and is believed to be current as of 03/01/2022. The information is based on the best available information and is not guaranteed.

What Actions Should I Take?

Companies should review their sales data to determine potential filing requirements. As part of that analysis, companies should review the taxability laws of states they haven’t had to address before and determine if any exemptions or exclusions apply. Items or services that are taxable in one state may not be in another.

Once this review is complete, companies should pause to determine whether they should register and start collecting or if there is an opportunity, based on the facts and a state’s law, to not register and collect. The Commerce Clause still applies, and Congress could act to regulate interstate commerce and impose limitations. Consequently, there is a need to act, but in a cautious and controlled manner. Voluntary disclosure agreements and amnesty programs may also come into play for companies who haven’t collected in prior years when they should have, even before this ruling.

Companies that haven’t had to file sales tax returns in many states and thus have filed manually, may now need an automated solution to comply with thousands of taxing jurisdictions. Companies should consider different providers to find the best fit for their industry and transaction volume.

Companies should follow state legislative actions and non-legislative actions closely. Don’t play the ‘wait and see’ game; prepare now regardless of how things shake-out over the next few months. Congress could act or new litigation and challenges could arise.

A 12-Step Program on How to Respond to Wayfair

Make your company audit-ready, and mitigate sales and use tax risk by completing the following steps:

  1. Determine Prospective Nexus. Compare the chart to your company’s sales-by-state for the last calendar year or prior 12-months (depending on the state). If your company is over the threshold in any state, move on to Step 2.
  2. Determine Prior-Year Nexus. Review your company’s connections or physical presence activity in prior years for the states you identified in Step 1.
  3. Evaluate State Income Tax Impact. Conduct both #1 and #2 for state income tax purposes to avoid collateral damage.
  4. Determine Taxability. The tax treatment (taxability) of what your company is selling (i.e., products, services, bundled transactions, etc.) may be different in each new state.
  5. Identify Exemptions. Determine if any exemptions apply to the products or services your company is selling in each new state.
  6. Get Your Use Tax Right. Perform a reverse audit of your company’s purchases (accounts payable) to determine overpayments/underpayments in preparation for more vendors charging your company sales tax.
  7. Obtain Exemption Certificates. Prepare to offer exemption certificates to vendors that start charging your company sales tax on your purchases.
  8. Mitigate Liability. Consider whether your company should enter into Voluntary Disclosure Agreements with any new states before collecting sales tax prospectively.
  9. Consider Tax Decision Software. Determine whether your company needs to acquire and implement new tax decision software or will continue to use a manual process.
  10. Assess Outsourcing Compliance. Determine whether outsourcing your sales tax compliance would be cost-beneficial.
  11. Register and File. Register in each new state for sales tax collection while considering the income tax impact and other taxes. File timely returns on a go-forward basis.
  12. Monitor and Maintain. Monitor state tax law changes and business changes. Maintain taxability engine rules or a manual taxability matrix for sales and purchases on an annually.

LBMC's Wayfair Diagnostic

The Diagnostic will be based on the following information:

  • What states your company is currently registered and collecting sales tax (copies of most recent sales tax returns for each state along with any accompanying work papers)
  • Your company’s sales by state report for the most recent 12-month period
  • Your company’s number (volume) of sales transactions by state report
  • Detailed description and explanation of the products and/or services your company sells
  • Detailed description and explanation of the customers your company sells to
  • Sample contracts (i.e., sales agreements, invoices, etc.)
  • Sample exemption certificates received from customers (if applicable)

We can help you determine what changes, if any, you need to make, and how to do them so you can move forward. Contact your LBMC client service partner or use our contact us form for your custom Wayfair Diagnostic.

Content provided by LBMC State and Local Tax professional, Jay Hancock and Leigh Ann Vernich.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

LBMC State and Local Tax Leader

Link to Jay The Wayfair Sales Tax Case: How the Ruling Redefines Sales Tax for Online Businesses

Jay Hancock

Shareholder, Practice Leader State and Local Tax

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