Sales Tax Compliance after “Wayfair”
Written by Nick Sarinelli, CPA, Partner of Nisivoccia LLP
This article appeared in OnSite, the Metropolitan Builders & Contractors Association of New Jersey Magazine.
The U.S. Supreme Court’s landmark 2018 decision in South Dakota v. Wayfair has prompted most states to enact or propose “economic nexus” statutes. These statutes impose sales tax collection obligations on out-of-state sellers based on their economic activities in the state, regardless of whether they have a physical presence in that state. The impact of these changes will be felt most by online and mail-order sellers that, before Wayfair, weren’t obligated to comply with sales tax laws in states where they lacked a physical presence.
A state’s power to impose tax obligations on a company is derived from the business’s connection, or “nexus,” within its borders. A business establishes nexus when it “avails itself of the substantial privilege of carrying on business” in the state. Before Wayfair, that meant maintaining a substantial physical presence in the state, such as offices, stores, plants, warehouses, employees or sales reps. In Wayfair, however, the Court recognized that modern technology makes it possible to establish nexus in a state solely through economic contacts, such as e-commerce sales or digital services. The Court declined to rule on the level of economic activity required to establish nexus, but in this case, it found that the thresholds set by South Dakota’s economic nexus statute were sufficient. The South Dakota statute requires out-of-state businesses to collect and remit South Dakota sales tax if, in the current or previous calendar year, they have either:
- More than $100,000 in gross sales of products or services delivered into the state, or
- 200 or more separate transactions for the delivery of goods or services into the state.
Wayfair opened the door for other states to enact similar statutes, or to begin enforcing laws already on the books. Most states have now enacted, or proposed, such statutes. Typically, to avoid legal challenges, these laws incorporate thresholds identical or similar to those upheld in Wayfair — $100,000 in sales or 200 transactions. Some states, however, have established more aggressive thresholds.
Although the Wayfair decision’s biggest impact is on out-of-state sales, it also can affect your purchases. For example, if you purchase equipment, materials or supplies from out-of-state sellers, those vendors may not have collected sales tax from you in the past. But if your state enacts an economic nexus statute, they may begin to do so. If these purchases qualify for a sales tax exemption, such as a resale or manufacturing exemption, you’ll need to furnish exemption certificates to the sellers. Also, if you’ve been paying use taxes on any purchases for which no sales tax was collected, be sure to review your use tax policies and procedures to avoid double taxation if vendors begin to collect sales tax.
If your business delivers products or services across state lines, it’s critical to review your activities. Then take steps to ensure compliance with rapidly evolving sales tax requirements.
Please contact Nick Sarinelli, CPA on 973.298.8500 if you have questions or to discuss this topic further.