What Does the ‘Wayfair’ Decision Really Mean?
On June 21, 2018, the U.S. Supreme Court concluded on one of the most important state tax cases of the last 25 years in Wayfair et.al. The majority overruled and overturned the sales/use tax nexus standard of physical presence, in a 5-4 split decision.
Flying in the face of the physical presence rule, South Dakota, like a number of other states, adopted an economic presence nexus statute for sales and use tax collection. Under that statute, a remote seller is required to collect and remit sales tax if:
- The seller’s South Dakota sales exceed $100,000, or
- The seller has more than 200 separate sales transactions into South Dakota.
South Dakota argued that e-commerce has evolved and ‘taken off’ in the last 25 years. The old physical presence rule was creating an unfair advantage for online retailers and was costing U.S. states billions in legitimate sales tax revenue. The court sided with South Dakota giving U.S. states more authority to collect sales tax regardless of physical presence. In response to this, each U.S. state either has or will pass more aggressive sales tax legislation in hopes of collecting sizable sales tax dollars.
What’s Does This Mean?
Despite this significant change in legislation, certain things have not changed with respect to sales tax. To the extent businesses sell to end-user customers and are not currently registered to collect and remit sales tax, the following in-state activities generally create a sales tax filing requirement: ownership of property including inventory, employees and representatives working within a state and providing taxable services in a state.
Based on the U.S. Supreme Court’s decision companies may feel compelled to register for sales tax collection without contemplating if their business has sales tax risk for periods prior to the Wayfair decision. Registering to collect and remit sales tax going forward in a U.S. state, without considering prior periods, could lead to a state-initiated review of prior periods and potentially expose businesses to prior return filing, while denying a business from filing under a voluntary disclosure program.
What the Wayfair decision means is that online retailers will now be required to collect sales tax from customers in individual U.S. states, even if they do not have a physical presence in those states. Major retailers such as Amazon and eBay may see a marginal impact, it’s small businesses (including Canadians) that need to pay more attention to these changes.
Here’s how small businesses can break down the significant impacts of this Supreme Court decision:
1. U.S. states must individually approve taxes across state lines.
U.S. states can now choose to tax most internet sales and mail orders. All U.S. states are not currently taxing across state lines, but we anticipate that it’s only a matter of time before all U.S. states adopt this stance since it will increase state revenues.
2. Online retailers must track sales levels and tax law changes in all U.S. states where they conduct business.
These U.S. sales tax changes have not been implemented in all U.S. states, so it will be important for online retailers to stay on top of these changes. Retailers should be paying attention to the transaction levels (dollars and sales volume) that require small business to pay state tax across state lines.
3. Retailers must set up systems to collect sales tax wherever they do business.
There is new software to help online retailers administer U.S. state sales tax, but it is expected that additional costs and resources will be taken on by small businesses as a result of this. Retailers may be required to send monthly payments and reports to states for sales tax based on where their customers live.
4. Online retailers need to re-evaluate their bottom line.
Small businesses that sell products on Amazon and eBay may see a hit to their profits as U.S. states start charging this sales tax. Online retailers will need to review their margins closely and may need to make some difficult decisions.
5. Brick-and-mortar retailers will benefit.
The Wayfair decision is a big win for brick-and-mortar retailers with physical stores who have found it hard to compete with online retailers. Consumers will no longer have a choice whereby they can avoid state tax by buying online in some states; so they may start going back to physical stores.
If you find your business may be affected by the Wayfair decision we can help. Our U.S. Taxation advisors have the knowledge and expertise to help you evaluate and determine the implications for your business.