The 2018 South Dakota v. Wayfair U.S. Supreme Court ruling is a landmark case that drastically changed out-of-state sales tax collection. Prior to the decision, a business could rely on the physical presence test when assessing sales tax collection requirements. The most common form of physical presence in a state is a brick-and-mortar location or storefront, but may also include physical presence through employee activities, payroll, office space, property, performance of services by independent contractors or trade show attendance. Historically, businesses with sales of goods or taxable services in a state have not been subject to sales tax collection requirements as long as the business had no physical presence in the state. The Supreme Court decision opened the door for states to adopt an “economic presence” test to determine if a company must collect and remit sales tax.
A casual observer of the many news reports they may have seen may conclude that the Wayfair decision affects only online retailers since Wayfair itself is an online retailer. However, this ruling affects any business that sells products and services and ships or provides them out of state. A business needs to pay attention to this law if they 1) sell products and 2) ship the products out of state.
Most states are now quickly adopting the economic nexus concept. Since this ruling, over forty states have already adopted an economic presence nexus threshold or are currently in the process of doing so. If a state has enacted legislation similar to South Dakota, South Dakota’s economic nexus laws establish economic nexus with the state if the following criteria are met: 1) had gross revenue from sales of goods or services delivered into the state exceeding $100,000 in the current or previous calendar year; or 2) sold goods and services for delivery into the state in 200 or more separate transactions. Many of the states which have already enacted legislation apply the gross revenue standard of $100,000. This, however, is a fairly low standard as most states have drafted their gross revenue standard to include revenue from exempt and wholesale sales. Beginning with each state’s effective date of their legislation, businesses must register for sales tax in that state if their sales exceeded the threshold. Then the sellers must charge sales tax on orders to customers in each state where they are registered. They must also file returns and pay the correct tax over to each state.
While many states offer manufacturers generous sales tax exemptions on certain equipment and machinery purchases, the industry is now faced with changing rules that impact both purchase and sales transactions. The Wayfair decision has important business implications manufacturers can’t afford to ignore. By doing so, they could possibly end up with large state sales tax bills and penalties for failing to comply with the new requirements.
Manufacturers will likely see a substantial increase in the number of states in which the company has sales tax nexus and a registration and filing requirement. Businesses that make only exempt sales, likely through all products being sold at wholesale, are still impacted by the Wayfair decision because they are still required to register and file sales tax returns where sales thresholds are met. Additionally, these businesses are also required to collect and maintain resale and exemption certificates from all customers. Manufacturers may need to add resources to ensure tax exemption certificates are received, validated and retained in all relevant states. Failing to adequately maintain exemption certificates can expose a business to significant liability in the event of a state sales tax audit.
To claim sales tax exemptions on their own purchases, including raw materials, manufacturers must apply for and obtain exemption certificates. Prior to Wayfair, manufacturers only needed to provide these certificates to suppliers that had a physical presence in the state where the manufacturer had operations. Now, however, manufacturers may need to issue sales tax exemption certificates to all their suppliers, regardless of where they conduct business.
However, not everything that manufacturers purchase is exempt from sales tax. Office supplies, hand tools, disposable products and even certain machinery or equipment are often subject to sales tax. Conversely, manufacturers may find that their suppliers are starting to charge sales tax in light of Wayfair. More now than ever, manufacturers should pay close attention to the invoices they receive from their suppliers to ensure they are not paying sales taxes in error (such as on purchases of raw materials).
Wayfair has changed the landscape of nexus standards for sales tax with most states already announcing adoption of economic nexus standards. Expanded compliance requirements will demand more resources, a potential need for a more sophisticated sales tax system and perhaps greater outsourcing of compliance. In addition, many state tax departments are gearing up to enforce the new expanded rules by hiring more revenue agents for sales tax compliance audits. Now is the time to begin the registration and reporting process in states where economic nexus has been established. If you have questions about your particular tax situation or need help in evaluating the impact of the Wayfair decision on your business, please contact us as soon as possible. Our experienced tax professionals can assist you with your sales tax guidance needs.