Have you ever noticed that no sales tax was collected on some of your online purchases? Although, internet purchases are not exempt from tax, e-commerce sellers need only to collect a state’s sales and use tax from in-state customers if the company has nexus, also called “sufficient physical presence” in a state. This is true until the U.S. Supreme Court announced its decision in the South Dakota v. Wayfair Inc. case in June 2018. The Court ruled that “the physical presence rule is not a necessary interpretation of the requirement for a state to collect tax. A company may now be liable for the collection of a state’s sales and use tax and be liable to pay income tax whether or not it has a physical presence in a state.
According to the report published by the U.S Commerce Departments, the e-commerce sales for the first quarter of 2018 alone is $123.7 billion. Unfortunately, states are not allowed to collect sales tax from customers if they are purchasing from vendors that have no physical presence in the states. It is estimated that in 2017 states had lost over $13 billion in sales tax they could not collect. Since e-commerce has grown rapidly during the past decade, many states argued that the physical presence rule is “unsound and incorrect.” Many states started using economic (sales activity) nexus as a baseline for determining if a multi-state business had a sales and use tax liability. To have economic nexus in a state, a company’s physical presence is not required.
Ever since the U.S. Supreme Court ruled on South Dakota v. Wayfair Inc., many states have already announced new sales tax guidance, while some other states are still reviewing the Wayfair ruling to determine what action, if any they will take. For example, economic nexus is established in South Dakota when an out-of-state seller has sales in South Dakota exceeding $100,000 or 200 separate transactions in South Dakota. Wisconsin changed its rules and beginning October 1, 2018 it will start collecting sales and use tax based on the Wayfair ruling. As of today, California hasn’t enacted any or changed its legislation based on the Wayfair ruling.
Another unintentional impact is the potential ability for states to piggyback off of the ruling and start enforcing businesses to pay income tax based on the economic connection the business may have with the state. Some states already base income tax standards on economic activity, but this new ruling gives states an opportunity to re-evaluate how to implement income tax on multi-state businesses.
The Wayfair decision may impact your multi-state business in the form of additional sales and use tax, additional income tax, and additional administrative filings. There is plenty of uncertainty around this decision and what states will do with it, if anything. A state-by-state analysis of your business should be considered to see if this new decision has any impact on your business. If you have questions please do not hesitate to contact your L&B professional at (858) 558-9200.