Are You Prepared for Changes in 2018 Sales Tax Legislation?
Legislation on State Economic Nexus: What is subject to sales and use tax
U.S. Supreme Court Decision: South Dakota vs. Wayfair
Big changes are on the horizon surrounding the rules of sales and use taxes specifically related to modernizing what is Economic Nexus. Economic Nexus is the legal construct that defines a state’s right to collect taxes from an out-of-state vendor, including when it doesn’t have an actual physical presence in a taxing jurisdiction but does have a substantial percentage of its overall sales in the state and/or locality. These changes are on their way and what we know is that there is nothing simple about them. Our customers all provide a mix of goods and services that are unique to their individual business objectives. The impacts of these changes will be determined by both a business’s physical location AND the location of their customers.
Add to this mix the number of non-profits that could be exempt from sales taxes and you could have situations that are ripe for complexity; opportunities for errors, and exposure to increasingly frequent sales tax audits. We can provide some clarity for you.
What is subject to sales and use tax?
On May 1, 2016, legislation in South Dakota was passed requiring remote sellers without a physical presence in the state to collect and pay sales and use tax to the state when in-state sales exceed $100,000 or at least 200 transactions in the previous or current calendar year.
On March 6, 2017, South Dakota’s 6th Judicial Court ruled that the state’s economic nexus legislation is unconstitutional. The ruling was challenged and pushed up to the South Dakota Supreme Court. In the 3rd quarter of 2017, the South Dakota Supreme Court heard arguments and subsequently struck down the state’s economic nexus legislation.
South Dakota then filed a petition with the U.S. Supreme Court to take up South Dakota vs. Wayfair to overturn Quill Corp. vs. North Dakota, a 1992 court case that instituted a physical presence requirement to establish economic nexus in applicable states. The U.S. Supreme Court accepted South Dakota vs. Wayfair on January 12, 2018.
With a 5-4 decision, the U.S. Supreme Court ruled in favor of South Dakota and overturned Quill Corp. vs. North Dakota. The court concluded that the “physical presence rule of Quill is unsound and incorrect”, as delivered by Justice Kennedy. The opinion of the court went on to state, “this Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State.”
Justice Roberts’ dissenting opinion submitted a change in the law is best left to Congress.
A major concern surrounding this decision was the possibility of retroactive application throughout the states, potentially causing complications in collection or notice and reporting requirements. The court specifically stated that the legislation would not be applied retroactively. 38 states signed a brief agreeing to not enforce any change retroactively.
Justice Sotomayor raised the question of an appropriate threshold. The decision upheld the South Dakota threshold of $100,000 in gross sales or at least 200 transactions in the previous or current calendar year. Other states have developed their own thresholds and will need to be reviewed on a case-by-case basis to fully understand the impact this ruling will have on your business.
A few things to consider if you are in a business that manufactures, distributes or sells products directly from or to states with sales and use tax:
. Cost of Sales Tax Collection
. Optimizing resources between Sales Tax Collection or Notice and Reporting requirements
. Exemption Documentation
. Impact on International Sellers
Call to Action:
If you are operating a business with Sales Tax Considerations (this includes Internet Sales), contact Morris + D’Angelo to further understand the important U.S. Supreme Court Decision and develop an action plan of how to achieve optimal implementation of collection or reporting standards.
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