South Dakota, the state that ushered in the economic nexus era for sales tax with the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., has enacted legislation to drop the transaction count from its remote seller collection threshold. The new law goes into effect on July 1, 2023 and remote sellers will no longer be required to collect and remit the state’s sales tax if they only exceed “200 or more separate transactions” in South Dakota. Remote sellers with $100,000 in gross revenue from sales into South Dakota remain liable for collection of the state’s sales tax.

South Dakota joins a handful of other states in dropping the transaction count threshold which tends to disproportionately impact high-volume, low dollar sellers. For example, a clothing company can easily sell 200 shirts at $20 each into a state thereby triggering economic nexus and its corresponding sales tax obligations. The sales tax obligations create a significant burden on a small business as the $4,000 in receipts (200 shirts x $20) results in a requirement to register for sales tax and file returns in the subject state. Achieving sales tax compliance is rarely as simple as flipping a switch. In the preceding example, the clothing retailer may need to add sales tax software to properly calculate the state and local sales tax based effective rates at the shipping destination. If the state is one of the several that exempt clothing, additional problems arise. Suppose that, in addition to clothing, the company also sells accessories. The retailer may now also need software to properly tax its products in the target state based on category (clothing = exempt, accessories = taxable).

South Dakota’s law change will not likely impact many of our clients, but it does illustrate the sales tax compliance considerations and complexities associated with economic nexus. State tax law changes, such as South Dakota’s, offer a minor respite to smaller business from the onslaught of economic nexus issues facing remote sellers. If your company has questions on economic nexus or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

Historically, manufacturers have been concerned primarily with the sales and use tax rules in their home states and how the rules impacted their purchases, and to a lesser extent, their sales. That all changed on June 21, 2018, when the U.S. Supreme Court rendered its decision in Wayfair v. South Dakota. The ruling allowed states to impose sales tax collection requirements based on a seller’s economic activity in their states, and what has followed is legislation in every state that imposes a sales tax to capture that additional revenue via economic nexus thresholds. The impact on manufacturers’ income can be substantial and the new laws make it imperative for manufacturers to understand key aspects of contemporary sales and use taxes, including economic nexus, manufacturing exemptions, exemption certificates, and sales tax compliance.

Economic Nexus

Before the emergence of economic nexus in 2018, the sales tax nexus standard was physical presence. A taxpayer was not required to collect or remit a state’s sales tax unless it had a physical presence (office, employees, property, etc.) in that state. Prior to Wayfair, it was common for a manufacturer to be registered and filing sales/use tax returns only in its home state. Now, any manufacturer with substantial sales outside its home state likely has economic nexus in one or more states. Economic nexus laws, along with their sales and transaction count thresholds, vary by state. The sales or receipts threshold is never less than $100,000 and a few states are as high as $500,000 (California, New York, and Texas). The transaction count threshold is typically either 100 or 200, although many states have chosen to forgo a transaction count when determining whether activity is sufficient to create economic nexus. Another consideration for manufacturers when assessing economic nexus is whether they are selling at retail or wholesale; several states do not count wholesales or nontaxable sales against the receipts threshold. Manufacturers with multi-state sales should evaluate their activity in each state to determine if economic nexus exists.

When an entity creates sales tax nexus it needs to take additional actions to achieve compliance. To file the required sales tax return, a business must register with the state and create an online tax account. Then the business needs to consider how it will determine the taxability of its sales and manage customer exemptions and the related exemption certificates. In most cases, sales of tangible personal property are taxable, but there are many potential exemptions that vary by state, including resale, use in manufacturing, and product specific exemptions, such as clothing or medical devices.

If your business has a robust ERP or sales system, taxability by state may be easily configurable. But for manufacturers lacking tax software or advanced systems, the process is manual, time-consuming, and prone to error. An efficient implementation is possible if you understand all the considerations associated with creating economic nexus for sales tax.

Exemptions

Sales tax exemptions for manufacturing are nuanced and subject to interpretation. The exemption language in most states includes phrases such as “directly used” or “directly and primarily” used in production. These phrases can be interpreted in different ways. Operations personnel often argue that manufacturing cannot occur without a specific piece of equipment, but that does not necessarily mean the equipment is directly used in production. Conversely, auditors will often attempt to narrow the scope of the manufacturing exemption based on when the production process begins and ends.

To further complicate matters, every state’s manufacturing exemption is different. For example, New Jersey, Ohio, and Pennsylvania all have manufacturing exemptions, but New Jersey’s does not apply to parts with a useful life of less than a year. Ohio and Pennsylvania exempt parts on equipment or machinery directly used in manufacturing.

Pennsylvania’s exemption includes purchases of “tangible personal property and otherwise taxable services to be used directly in research operations …” while other states such as Ohio largely limit the research and development portion of the exemption to “… capitalized tangible personal property, and leased personal property that would be capitalized if purchased ….” The contrast illustrates the disparate approaches states take with their manufacturing exemptions.

Utilities used in production are commonly included in a manufacturing exemption, though not by all states. Here again there is a lack of consistency: New Jersey provides no exemption from tax for electricity used in manufacturing; Florida, Ohio, and Pennsylvania offer exemptions on utilities used in production in most cases. Utility exemptions are frequently based on utility studies that quantify production use versus general use. But utility studies are rarely updated on a regulation basis and can be out of date or inaccurate resulting in either exposure or opportunity if the manufacturer’s operation has changed since the previous study.

The use of a forklift is another issue that can result in exposure or opportunity. Forklifts may be used to unload raw materials (typically considered pre-production) or move finished goods (usually considered post-production). In most cases, these uses of a forklift are taxable, but what happens when that same forklift moves in-process goods or materials? The answer depends on the state’s statutes and regulations, but in many cases, that forklift—or at least its percentage of use in the exempt activity—will be eligible for exemption.

Sales Tax Compliance

Filing requirements due to economic nexus can overwhelm a tax department or the individuals responsible for filing the manufacturer’s sales tax returns. Many businesses have gone from filing in one state to filing in 40-plus states since Wayfair was decided in 2018. Filing multiple sales tax returns is a major adjustment that requires investment in technology and people. There are over 10,000 discrete state and local sales tax rates in the United States. Accurately charging and reporting sales tax is a monumental task without advanced software. Is your business prepared to handle sales tax and filing returns in all states where you have sales if required? Based on increased sales and use tax filing obligations, you may need to consider compliance options, including outsourcing or software solutions.

Exemption Certificates

With more sales tax obligations in more states, the complexity around compliance increases. Are you obtaining exemption certificates from customers that purchase goods tax-free? If yes, is the certificate valid as completed by those customers? Florida, for example, requires a new certificate every year to qualify for its resale exemption. Other states require the seller to verify the purchaser’s tax ID on the state website. In addition, the “good faith” rules imposed by states vary dramatically, and incomplete or invalid exemption certificates prove an unwelcome surprise during a sales tax audit. As anyone who has been through an audit knows, tracking down exemption certificates three or four years after a sale is like playing craps, you roll for a while with some success, but eventually you crap out and lose to the house, or in this case, the state. Being prepared means knowing each state’s requirements and reviewing certificates as they are received.

Solutions

The HBK SALT Advisory Group is here to provide solutions based on your unique set of circumstances. Whether you require consulting, compliance, or audit defense services, we are your SALT partner and resource. Collectively, our team has more than 50 years of experience with indirect taxes and has been advising our manufacturing clients since before the turn of the century. We can help you address economic nexus, apply manufacturing exemptions, and explore outsourcing your sales tax compliance.

To initiate a conversation with the HBK SALT Advisory Group, email us at hbksalt@hbkcpa.com or visit our website for more information on our capabilities here.

As activity in the board game industry continues its fast pace, developers seeing their sales figures grow face new and different kinds of challenges. One of those is keeping up with sales and use taxes in the various states where they do business. Relatively new laws about reporting and paying sales taxes, even when a developer has no physical presence in a state and even for online sales, must be adhered to and accounted for to avoid a severe negative impact on profitability.

Virtually all states now have so-called “nexus” laws that require sellers of products across state lines to collect, report, and pay taxes on their sales. The regulations can be particularly cumbersome and annoying to board game developers whose profitability is based on volume sales of relatively low-priced products. Most states apply nexus thresholds based on annual sales in dollars, or, what is more likely to burden board game developers, a number of transactions.

Background

In 2018, in South Dakota vs. Wayfair (“Wayfair”), the U.S. Supreme Court denied a challenge to South Dakota’s law requiring remote sellers who sell into the state to collect sales tax if they exceed the state’s economic nexus threshold. The decision materialized into new laws—every U.S. state that imposes a sales tax has passed “economic nexus” legislation—that require out-of-state businesses selling to customers in their states to collect and remit sales taxes on those sales once they have reached the certain sales or transaction thresholds.

Before Wayfair, businesses were required to collect and remit sales taxes only if they had a physical presence in a particular state. Physical presence could refer to an office or other property, or to an employee entering the state to sell or provide services. But in the wake of Wayfair, a physical presence is no longer required for a state to compel sales tax collection. Economic nexus is sufficient and triggered when a business from outside the state sells a product or taxable service into the state.

Economic nexus laws on remote sellers generally require out-of-state sellers to register, then collect and remit sales taxes when the sellers meet sales or transaction thresholds, which are set independently by each state. Many states have chosen $100,000 in sales or 200 transactions as the levels of activity that trigger economic nexus, but each state has its own thresholds, rules, and guidelines.

Cumbersome and expensive

In addition to being cumbersome, complying with state nexus laws can be expensive, especially if the business sells into several states, as each state will have different nexus requirements. The sales tax nexus thresholds apply to annual activity, but sales tax filings are typically required on a monthly or quarterly basis, which can require the seller to add employees, make modifications to its accounting or resource planning systems, or engage an outside consultant or resource to keep up with all their sales tax compliance requirements.

Despite complexity and cost, businesses small as well as large clearly are obligated to determine what additional states they will have to file in. They will have to register with the revenue departments in those states, collect sales tax from their customers, then file returns and remit the taxes. As well, some states have begun to apply the economic nexus standards to corporate income taxes, which could require sellers into their states to file and pay income taxes.

Trade shows

Rules for trade show and convention sales also vary from state to state. Many developers attend Gen Con, Origins, PAX Unplugged and others to demo and sell their games. But sales are typically taxable if the seller is at the show selling for even a couple days. Trade show exhibitors generally need to collect sales tax as well as register in the state with a vendor license if they anticipate making sales at the trade show.

An overview of nexus laws relative to trade show sales in states with major board game conventions:

Indiana

Displaying merchandise at a trade show in Indiana is sufficient to create nexus in the state. Transient retailers are also required to register and collect tax.

Ohio

The state has a safe harbor for sales tax nexus related to trade shows if only attending the trade show as a consumer or participation by out-of-state sellers subject to certain limitations. The state offers a transient vendor’s license when sales are made from a trade show.

Pennsylvania

The state does not have any formal guidance on trade shows and sales tax. However, the policy of the Department of Revenue appears to be that exhibiting and selling at trade shows creates a sales tax collection and filing obligation.

Texas

If the purpose of attending a trade show in Texas is to introduce and sell a product to Texas customers, then the retailer could be required to collect and remit tax. If orders are taken in Texas, then an obligation likely exists based on current case law. Additionally, Texas regulations clearly state that anyone selling in the state must collect tax and have a sales tax permit.

California

Attendance at a trade show in California does not create nexus if limited to 15 days in a 12-month period and less than $100,000 in net income from trade show activities. If sales are made or orders taken, and later delivered to California, tax is due on the transactions. A temporary permit may be obtained for businesses that qualify under the trade show exception.

Solutions

Board game manufacturers might find it difficult to generate sales tax data from their online systems. While developers can typically produce reports of sales by customer with shipping addresses, they might need to add software to their current selling platform or purchase an entirely new software solution to produce the detail needed to comply with the unique laws of the multiple states where they sell their games.

The HBK SALT Advisory Group can help. We have been assisting clients with their economic nexus considerations since South Dakota vs. Wayfair.

Among our services:

• We provide sales/use tax nexus studies based on your sales volume and transaction counts. The study includes the nexus trigger in each state. The nexus study can also include income tax and gross receipts tax obligations based on physical presence and/or factor presence.
• We help businesses identify the states where they have an obligation or tax liability and propose practical solutions. If the company has not been contacted by the state, we can anonymously and proactively approach the state under a voluntary disclosure agreement (VDA). A VDA allows a taxpayer to achieve compliance with the benefit of a limited look-back and abatement of penalties.
• We provide tax advisory services to clients to address all areas of sales/use tax. When businesses create sales tax nexus, they often have questions on preparing returns, determining product taxability, or collecting exemption certificates. Product taxability is an issue for board game developers that provide their games electronically, either by download or SaaS. State treatment of SaaS and electronically downloaded software varies, and many states do not tax SaaS, and to a lesser extent electronically downloaded software.
• We have the expertise and experience dealing with revenue departments throughout the nation that allow us to save our clients money through increased compliance and identification of savings opportunities.

For more information or to schedule a meeting to discuss your sales and use tax obligations, contact HBK SALT at hbksalt@hbkcpa.com

As 2021 is over we begin to consider the year ahead and what is in store from a state and local tax (SALT) perspective. Nexus is a significant area of focus in SALT and the evolution of nexus will continue in 2022. The last few years brought us economic nexus via the Wayfair decision and the subsequent economic nexus legislation enacted by the states. The pandemic has also played a large role with employees rapidly shifting to work from home. This transition resulted in temporary nexus guidance from many states to address the related nexus issues resulting from employees moving from office work to working from home.

On the sales tax economic nexus front, 2021 saw the last three states (Florida, Kansas and Missouri) finally pass nexus legislation. The Florida and Kansas laws went into effect in July 2021 and Missouri’s comes online January 1, 2023. Additionally, two states, Maine and Wisconsin dropped the transaction count component of their economic nexus thresholds. The transaction count trend began almost as soon as states began passing legislation as the transaction count threshold (typically 200 transactions) can require small sellers that sell many low-price items to register and collect in many states. The intent of the Wayfair court and to a lesser extent, the states, has been to provide some protection for small businesses. Many of these small businesses simply do not have the resources to administer sales tax in multiple jurisdictions. The elimination of the transaction count threshold in more states will significantly benefit small sellers.

Wayfair or economic nexus became a reality with the court’s decision on June 21, 2018, however; it took months for the states to react. The states had to pass economic nexus laws, provide notice to remote sellers, and address issues of administration. In the subsequent months and years, most states were lax with taxpayers that registered after the effective date of their remote seller law. For example, if a taxpayer registered on April 1, 2019, in a state that imposed economic nexus on October 1, 2018, often the state did not question the timing of the taxpayer’s registration (or the fact that six months passed from the effective date of the legislation). In essence, there was an unspoken grace period offered by many states. The grace period began to fade away in 2021 as we have seen several states starting to question new registrants. Often, the states either send a nexus questionnaire asking for specifics on the date of first sales in the state or they may be more direct and ask the taxpayer to document their sales threshold in the state. Taxpayers should evaluate any historic risk before registering in a new state for sales tax. In some cases, it may be best for the business to pursue a voluntary disclosure if a material liability exists. The tax is required to be paid under a voluntary disclosure, but penalties are abated. In addition, a voluntary disclosure agreement normally has a limited lookback and generally, an agreement prevents a state from reviewing older periods.

One of the primary nexus questions since 2020 has revolved around the impact of the pandemic and the resulting move of employees to remote work. In 2020, many states provided guidance that they would temporarily suspend income tax and/or sales nexus rules if a company’s only activity in the state was an employee temporarily working from home due to COVID-19. In the latter half of 2021 and into 2022, states are lifting their temporary nexus guidance. This will affect businesses in states where employees work from home, but the business is not currently registered for income tax and/or sales tax. Pennsylvania and New Jersey each revised their nexus guidance related to telecommuting employees effective July 1, 2021, and October 1, 2021, respectively. Currently, employees working remotely in either state may create income tax or sales tax nexus.

While we always hope the new year is better than the last, we also expect these nexus considerations to grow in 2022. The impact for some companies will be significant as states move to impose nexus on out-of-state businesses. If your company has employees working remotely or you have increased interstate sales in recent years now is the time to review your nexus footprint. A nexus review can identify tax issues before the state does and offer you the opportunity to control and direct the solution. HBK SALT Solutions is here to assist at any stage from the nexus review process to the tax filings required to obtain compliance. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

In 2018, in South Dakota vs. Wayfair (“Wayfair”), the U.S. Supreme Court denied a challenge to South Dakota’s law requiring remote sellers who sell into the state to collect sales tax if they exceed the state’s economic nexus threshold. The decision has materialized into new laws—every U.S. state that imposes a sales tax has passed “economic nexus” legislation—that require out-of-state businesses selling to customers in their states to collect and remit sales taxes on those sales once they have reached the certain sales or transaction thresholds. Before Wayfair, businesses were required to collect and remit sales taxes only if they had a physical presence in a particular state. Physical presence could refer to an office or other property, or to an employee entering the state to sell or provide services. But in the wake of Wayfair, a physical presence is no longer required for a state to compel sales tax collection. Economic nexus is sufficient and triggered when a business from outside the state sells a product or taxable service into the state. Economic nexus laws on remote sellers generally require out-of-state sellers to register, then collect and remit sales taxes when the sellers meet sales or transaction count thresholds, which are set independently by the each state. Some use strictly a dollar amount as a threshold, others a dollar amount and/or a number of transactions. Many states have chosen $100,000 in sales or 200 transactions as the levels of activity that trigger economic nexus, but each state has its own thresholds, rules, and guidelines. What Nexus Means to Businesses Many small and mid-size businesses have been slow to react to the new economic nexus laws. Complying can be cumbersome as well as expensive, especially if the business sells into several states, as each state may have different nexus requirements and sales tax rules. The sales tax nexus thresholds apply to annual activity, but sales tax filings are typically required on a monthly or quarterly basis, which can require the seller to add employees, make modifications to its accounting or resource planning systems, or engage an outside consultant or resource to keep up with all their sales tax compliance requirements. Despite complexity and cost, businesses small as well as large clearly are obligated to determine what additional states they will have to file in. They will have to register with the revenue departments in those states, collect sales tax from their customers, then file returns and remit the taxes. As well, some states have begun to apply the economic nexus standards to corporate income taxes, which could require sellers into their states to file and pay income taxes. Still, there are subtleties that require examination to determine where and even whether to register. Some states count only taxable sales towards their thresholds; others include gross sales or receipts. For example, a manufacturer that sells parts to a wholesaler for resale will not include those “sales for resale” in states where exempt sales are excluded from the threshold measure. However, that manufacture should ensure it receives an exemption certificate from its customer. Tracking and maintaining exemption certificates is key to avoiding any issues with a state that might later challenge the manufacturer’s nexus or filing determination. There are also the matters of materiality and practicality. A business could technically have an obligation to register and file sales tax returns, but will it do so if no tax liability exists and no taxable sales are planned? It is not uncommon for these businesses with minimal exposure to eschew registration. Often the minimal exposure is manageable compared to the administrative burden and costs associated with registering and regularly filing sales tax returns. HBK SALT Solutions How do you measure all those thresholds to determine where you need to register for sales tax? If a state economic nexus law went into effect in 2018, but your business hasn’t registered yet, what do you owe for prior years? There is often more than one solution to the economic nexus puzzle and more than one answer to the question of how to address the related sales tax compliance. The solution for your business needs to consider the quantified tax liability and associated risk. HBK can review your business activity and provide a concise economic nexus analysis. The HBK SALT professional team has been helping businesses address economic nexus and resolve their sales tax compliance issues with state revenue departments since Wayfair broke in 2018. We have sales tax nexus and compliance conversations with clients on a daily basis. We help clients evaluate their sales tax nexus and quantify their exposure. Identifying where your business has sales tax nexus is simply the first step on the road to compliance. There are many factors to consider in assessing sales tax nexus and what steps to take. HBK asks the right questions to craft a solution tailored to your business and its resources. There are many factors that go into determining the best course for addressing sales tax issues arising as a result of economic nexus. Our discussions with you will clarify your company’s issues and needs. The following questions provide a sense of the nuance involved in sales tax and also help identify the options available to taxpayers as they plan for sales tax compliance.

• Is your product or service taxable in states where nexus has been established?
• Does your business have a process in place to obtain exemption certificates from customers?
• Does your business have past tax liability that is best addressed through a voluntary disclosure agreement?
• Does your business have the resources to handle sales tax registrations in multiple states?
• Does your business have the resources to file sales tax returns in multiple states?
• Are your systems capable of calculating sales tax rates and reports in all jurisdictions?
• Does your business need a sales tax software solution?
• Has your activity in other states created nexus or filing obligations for income/franchise or gross receipts taxes?

HBK will evaluate your obligations based on your response to these and other questions and provide an efficient solution. We will develop a plan with your input to address your sales tax responsibilities in an effective manner while considering risk and materiality. Our plan will consider a number of solutions from voluntary disclosure agreements to prospective registrations. A voluntary disclosure agreement is a proactive approach that allows us to contact a state without disclosing the taxpayer’s identity and typically results in the abatement of penalties and a limited lookback period in exchange for payment of tax and interest. If the economic nexus has been more recently established, we may put together a plan for prospective sales tax registration and documentation of prior periods. Through our experience and work, we have established relationships with state and local revenue departments throughout the nation. Our expertise and these relationships have allowed us to save our clients millions of dollars in reduced obligations while also increasing our clients tax compliance. As state and local governments seek to generate more revenue, they are leaving few stones unturned. We expect a substantial increase in state sales tax examinations in the coming years. States spent freely to combat the COVID pandemic and as business returns to normal they will be seeking to refill their coffers. Economic nexus is a tool they can use to generate substantial revenue and its primary target is out-of-state businesses. It is imperative that taxpayers engage their state and local tax expert to help them negotiate the current sales tax landscape and prepare to protect their bottom lines.

Effective April 1 2019 the state legislature of California enacted economic nexus for sales tax with a threshold set at $100,000, however, effective immediately, the state has changed this provision by increasing the threshold to $500,000. This change impacts any business which sells products or services within or to individuals or business into the state of California. It does include online sales.

If you registered under the $100,000 threshold (and don’t exceed the new $500,000 threshold), you can choose to either maintain your account or cancel it if you no longer meet the economic nexus thresholds within the state. Please keep in mind that if you do not meet the new $500,000 threshold and choose to maintain your account with the state of California you may still have filing requirements.

The California Legislature recently passed Assembly Bill No. (AB) 147 which requires:

Retailers located outside of California (remote sellers) to register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax if, in the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer exceed or exceeded $500,000; and

All retailers required to be registered with the CDTFA, whether located inside or outside of California, to collect and remit district use tax to the CDTFA on all sales made for delivery in any district that imposes a district tax if, in the preceding or current calendar year, the total combined sales of tangible personal property in this state or for delivery in this state by the retailer and all persons related to the retailer exceeds or exceeded $500,000.

The new collection requirements are operative as of April 1, 2019, and supersede our previous direction regarding 1) the use tax collection requirements for out-of-state retailers (see Special Notice L-5652), and 2) the district use tax collection requirements for all retailers, including retailers located inside or outside California (see Special Notice L-5913).

If you are a remote seller who previously registered with the CDTFA to collect California use tax due to the state’s prior direction (see Special Notice L-565), and you do not meet the new $500,000 sales threshold pursuant to AB 147, nor do you have any contacts with California that would qualify you as a retailer engaged in business there, you may either close your account or continue to collect the use tax as a courtesy to your California customers.

To close your account, please contact the California legislature’s Customer Service Center at 1-800-400-7115. Please be advised, any use tax collected by you from your California customers must be reported and paid to the CDTFA. Additional registration and fee collection requirements for sales of certain items may apply.

Please note: If you sell 1) new tires or vehicles and equipment that include new tires, 2) covered electronic devices, 3) lead-acid batteries, or 4) lumber or engineered wood products, you may have additional registration and fee collection requirements.

If you have questions, please contact HBK Tax Advisory Group member Cassandra Baubie, JD, at CBaubie@hbkcpa.com.

This document provides a guide on how drop shipping relationships have changed following the new tax laws and regulations after the decision in South Dakota v. Wayfair.

Drop shipping is a fundamental aspect of the supply chain and represents two separate and distinct transactions. The seller accepts orders from their customers, invoices the customers and receives a shipping address. That shipping address can be in a state in which the seller has a presence or any other state that the seller is not located in. The seller then places an order with the supplier to fulfill the customer’s order who will ship that product directly to the shipping address provided. The supplier never invoices or deals directly with the customer; they engage in a sale solely with the seller.

Click here to read the full article.

On June 21, 2018, the Supreme Court of the United States overruled the 1992 decision in Quill Corp. v. North Dakota, requiring physical presence for sales taxation, removing the barrier states faced in imposing sales tax on out-of-state retailers in this age of e-commerce. In the months following the Court’s ruling on that case, South Dakota v. Wayfair, Inc., over 30 states have enacted or proposed economic nexus provisions in an attempt to reap sales tax from qualifying out-of-state retailers.

South Dakota’s economic nexus provision imposes a sales tax registration and filing obligation on any out-of-state retailer lacking a physical presence if they have more than $100,000 in gross sales or 200 or more transactions into the state. Out-of-state retailers exceeding either threshold will be required to register with the state, and collect and remit sales tax.

Many states have used South Dakota’s law as a road map, enacting laws with similar or identical thresholds; twenty-five states currently have adopted thresholds identical to South Dakota’s. States that had economic nexus provisions set prior to the decision in Wayfair were encouraged by the Court to impose these standards only going forward, not retroactively. Several states such as Georgia, Massachusetts, Ohio and Texas, have thresholds higher than the majority of states. Ohio for instance has a $500,000 threshold, and is one of a few that have added “software” and “network” nexus provisions to their standard. Alternatively, Pennsylvania, and Oklahoma have the lowest thresholds at just $10,000 in sales. While the majority of states will have economic nexus thresholds in place before 2019, there are several states who have taken a wait-and-see approach, such as Arizona, Kansas, Missouri, New Mexico, Idaho and Virginia, all of whom have yet to propose economic nexus legislation.

While taking the wait-and-see approach, Florida has been vocal with regards to its stance on the Wayfair decision, especially in terms of retroactivity. Although the state has yet to formally propose any legislation, Florida Attorney General Pamela Bondi said that state attorneys would be permitted to apply the Wayfair decision retroactively to defend against refund claims, or tax assessment challenges. As noted in an August 9, 2018 court filing, “Wayfair controls the outcome of this matter, and there is no reason that case should not be applied retrospectively as well as prospectively.” Bondi acknowledged that South Dakota’s economic nexus law “expressly forbids retroactive application,” but insisted “this was hardly the basis for the court’s decision.” Florida is an outlier in this view, as many states have abided by the Courts words and focused on perspectivity in their economic nexus provisions. Florida’s opposition to following the crowd on this issue is surprising. Florida is also one of the few states that is neither a member of the Multistate Tax Commission (MTC) nor the Streamlined Sales Tax Governing Board (SST). Both of these organizations, originating long before Wayfair was decided, were created in an attempt to bring states and businesses together under simplified, and uniform taxing provisions.

What This Means for Retailers
As a result of the Wayfair decision, businesses will need to change the way they view sales tax. For better or worse the landscape has changed, and this will mean an increased filing obligation on retailers selling into multiple states in amounts exceeding their economic nexus thresholds. Prior to Wayfair the standard set by the 1992 Supreme Court in Quill mandated that an out-of-state retailer have physical presence in a state before that state was permitted to impose a taxing obligation on that retailer. Since 1992, retailers have used Quill to shape how they comply with their out-of-state taxing obligations. The decision to overturn that physical presence standard will impact businesses of every size and will require businesses to more-closely track their out-of-state footprint.

Businesses should start by examining their national footprint, by looking at their sales by state: both the total dollar amount as well as the number of transactions. In states where businesses have sales exceeding the economic nexus threshold amounts on or after the dates of enactment their nexus laws (see the chart below), those businesses now have a potential registration and sales tax collection and filing obligation. Some businesses could be lapsing on these obligations currently, had they exceeded the threshold and failed to register, collect and file by the date of enactment.

While the vast majority of states have agreed to follow the Court and implement economic nexus only prospectively, that does alleviate potential liability. If a business has exceeded the economic nexus threshold in a state on its date of enactment, it has a liability to that state from the date of enactment. For example, if your Florida-based business sold more than $100,000 into Maryland between October 2018 and December 2018 – Maryland’s economic nexus enactment date is October 1, 2018 – and you failed to register, collect and remit starting on October 1, 2018, you have an outstanding obligation to Maryland on those sales since October 1, 2018. You could also be assessed penalties and interest on taxes you should have been collecting and remitting. Once a threshold has been met, the business is liable for the tax. A failure to register does not eliminate any outstanding obligations to the state.

There is no way to know how aggressively states will enforce these lapses in collection. Many sales tax registration forms require an entity to record their “first day doing business” in the state. So, if you are a business that decides to register for every state come January 1, 2019, but you were doing business in those states as of October 1, 2018, you can be held liable for any owed tax for that period plus penalties and interest. There are also opportunities for businesses who have lapsed in their registration and collection obligations to “self-audit” and pay back taxes owed through Voluntary Disclosure Programs (VDAs or VDPs). These programs have the benefit of a limited lookback period and reduced or eliminated penalties.

Prior to Wayfair many businesses took a passive approach to sales tax registration and collection in states where they lacked physical presence. But a passive approach will no longer work. Businesses are also seeing increased scrutiny on exemption certificate use, drop-shipment relationships and FOB shipments. The implications of Wayfair are widespread and increasing as states begin to develop laws in response to the Court’s decision. The landscape has changed, and in order to minimize the costs of complying with Wayfair, the more proactive a business is in getting a handle on its presence across state lines the better.

If you have questions about how Wayfair impacts your business, please contact us.

Please note that this is the latest article on this topic from our Tax Advisory Group. You can review the previous publications at the following links for a comprehensive overview of the case and rulings.

Supreme Court Rules in Favor of State in Wayfair v. South Dakota

New Jersey Reacts to South Dakota v. Wayfair Remote Sales Ruling

Following the June 21, 2018 U.S. Supreme Court decision in South Dakota v. Wayfair to overturn the requirement that remote sellers must have a physical presence in a state in order to be required to collect that state’s sales tax, the state of New Jersey has enacted economic nexus provisions consistent with that ruling.

On June 21, 2018, the U.S. Supreme Court overturned South Dakota v. Wayfair, which had required remote sellers – that is, out-of-state sellers – to have a physical presence in a state to be required to collect that state’s sales tax. The state of New Jersey has enacted “economic nexus” provisions consistent with the Supreme Court ruling. Effective Oct. 1, 2018, a remote seller of tangible personal property, specified digital products, or services for delivery into New Jersey must register, collect and remit New Jersey sales tax if that seller meets either of two thresholds: gross revenue from those sales in excess of $100,000, or that has completed 200 or more separate sales transactions.

Only remote sellers that meet at least one of those criteria is obligated to register and comply with New Jersey tax liabilities. However, a remote seller who fails to meet either of these criteria may choose to voluntarily register with the state, collect tax and remit. The provision applies on a prospective basis as of October 1 and will not alter a taxpayer’s obligations for any sales activity prior to that date.

Clients selling remotely into the state of New Jersey should be taking steps to determine if the total amount of sales they will generate will push them over the thresholds.

Please remember that this law is effective on and beyond October 1st 2018 prospectively. Prospective treatment will not be granted to taxpayers who have physical presence within the state.

If there are any questions as to whether you will be required to register with the state of New Jersey due to this change, or with any other state tax question, please contact a member of the HBK Tax Advisory Group.