It’s been more than a year since the U.S. Supreme Court allowed states to tax online sales in its South Dakota v. Wayfair, Inc. (“Wayfair”) ruling on June 18, 2018. But the ramifications of this landmark decision are still developing as states scramble to take advantage of the opportunities it offers to raise more revenue, and businesses with online sales struggle to understand the tax liabilities it creates.
Essentially, Wayfair changes the definition of “nexus” — the tax liability connection a business has with a state because of a presence in it — from physical to economic. Before Wayfair, a business needed to have property, employees or activities of some kind in a state to have nexus. Now, while those standards of nexus still apply, simply selling things online to customers in a state — whether retail or wholesale — can create an “economic nexus” with it if the dollar amount of online sales or number of online transactions exceeds certain thresholds. As a result, you may find that your business owes sales tax to more states than it used to, and that could have serious implications for your bottom line.
What you need to do
If you sell things online, you first need to determine the states in which you sell them. Next, you need to find out what the thresholds for economic nexus are in each of those states, and see whether you’ve exceeded them. If so, you then need to determine your tax liabilities in those states and pay them.
Assuming you can track sales geographically, the first part is relatively easy. But the second is more complicated, because many of the standards for economic nexus, the dates they go into effect, and the registration and reporting requirements involved, vary by state.
For example, South Dakota, which led the fight for economic nexus, passed an economic nexus law on November 1, 2018 that set a threshold of either $100,000 in online sales of products/services or 200 sales transactions in the previous or current calendar year. Many other states set the same thresholds. But some states, such as Alabama and Mississippi, set a higher threshold ($250,000) while others, such as Massachusetts and Minnesota, set a lower threshold (at least 100 transactions).
Also, the time period for counting transactions differs. While it’s calendar year in South Dakota, in New York it’s the four preceding sales tax quarters, and in Minnesota, the preceding 12 consecutive months. A few states, such as Florida, Kansas and Missouri, don’t currently have economic nexus laws. Others have revised or are in the process of revising them. For example, California and New York have raised their thresholds to $500,000, and Washington has removed its transaction threshold. So you’ll need to keep an eye on developments in economic nexus laws to know how they may affect your business.
It gets even more complicated
Dizzy yet? If not, the recent trend of passing state marketplace facilitator laws may make your head spin. These laws require businesses or organizations, such as Amazon, E-bay and Etsy, that facilitate the online sales of other businesses to collect and pay the sales taxes due because of economic nexus. This removes from individual businesses some of the burden of complying with economic nexus laws — but not all. If your business makes online sales in another state directly from your website, you will still have to track and pay those taxes yourself if total sales from your site and the facilitators’ sites exceed the state’s threshold.
To make things worse, Wayfair has opened the door for states to also impose state income, use and franchise taxes on remote sellers. So far, only a few states have enacted laws to do that, but given the thirst for revenue, more states may do that in the future.
The decision also makes performing due diligence for acquisitions and mergers more complicated, because the firms buying or merging with another must now determine whether there are unpaid tax liabilities — including penalties and interest — resulting from economic nexus. In addition, because of successor liability laws, the officers of the acquiring company may become personally responsible for the other company’s failure to meet its tax obligations. Many states do not have a statute of limitation for non-filers, so it could be necessary to look back for as long as the company had nexus with a state to determine whether there is any liability that could affect the deal.
Furthermore, because the effective date of a state’s economic nexus law can be different from the effective date of its marketplace facilitator law, a company might be compliant with one but not the other. Also, while many states have pledged not to retroactively apply Wayfair, there’s no guarantee that some won’t decide to do that, at least for taxes other than sales and use taxes, such as excise or franchise taxes. Bottom line: due diligence for companies with remote sales now requires a very deep dive into both their sales data and the laws of the states in which they made online sales.
Our tax experts can help
As you can see, Wayfair has created a jungle of potential tax liabilities for businesses — as well as for nonprofits — that sell things online to buyers in other states. Without a guide who knows the territory, it’s difficult to make your way through all the implications of Wayfair without getting tangled up in nexus laws, stung by noncompliance penalties or stuck in the quicksand of due diligence.
This is where ARB’s experienced business tax professionals come in. We can help you determine how Wayfair and state nexus laws may apply to your business and, if so, what to do. Contact us today and let us know how we can be of assistance.