On June 21, 2018, the Supreme Court ruled that a state may require remote sellers to collect sales tax, overturning the bright line physical presence test. Any seller with a substantial virtual or economic presence can now be obligated to collect sales tax without violating the Constitution. This is a major win for states, as it will allow for an $8 to $33 billion increase in aggregate revenue for use for public duties. However, in the months since the South Dakota v Wayfair ruling, business owners have been left with considerable uncertainty about what the new economic presence test means for them.
Who does this affect?
Nothing has changed for brick and mortar stores. The decision is directed at remote sellers. Large online retailers such as Wayfair, Amazon and Overstock are capable of providing the infrastructure necessary for sales tax compliance. Many already have started collecting tax to resolve on-going disputes with taxing authorities. Small and medium sized businesses are likely to be the most impacted by the decision. Chief Justice Roberts was particularly concerned that smaller businesses would crumble under the burden of compliance. Given the tax revenue attributable to online sales, states are taking advantage of the Wayfair decision to extend their sales tax collection with varying thresholds to protect small remote sellers. Remote sales businesses must anticipate efforts and adjust to the forthcoming changes.
Pennsylvania Nexus Standards
Pennsylvania has adopted economic nexus legislation that requires remote sellers, marketplace facilitators, and referrers who “refer” annual sales of $10,000 or more in Pennsylvania to elect to either collect and remit state sales tax, or observe notice and reporting requirements, by March 1 2018 (June 1 of the following years). Those who elect the “notice and reporting” option must:
- Post a conspicuous notice on their platform;
- Provide a notice at the time of the business transaction;
- Send a notice to every seller by January 31 of each year; and
- Provide the state with a list of customers by January 31 of each year.
However, these “notice and reporting” rules do not apply to sales of digital products until 3/1/2019.
The penalty for failing to comply with the notice and reporting requirements, if elected, is the lesser of $20,000 or 20% of total in-state sales in the previous year (Act 43 of 2017). Those who elect to collect and remit tax can be assessed for the tax (6% in most Pennsylvania Counties), interest and penalties for failing to remit the appropriate amount of withheld tax.
Click here to see the Pennsylvania summary of sales tax rules applicable to remote sales.
New Jersey Nexus Standards
Just a few weeks after the Wayfair decision, New Jersey lawmakers responded by passing Assembly Bill 4261. The bill stipulates that remote sellers will be required to collect and remit New Jersey sales tax if they exceed either 200 business transactions, or $100,000 worth of transactions, on an annual basis. Further, the bill includes sales tax collection and reporting requirements for marketplace facilitators.
Online purchases generate considerable data trails, even though sorting and transmitting the information required to satisfy various state and local tax authorities is far more difficult. Due to the uniformly poor “use” tax compliance rates, states will likely require out-of-state sellers to collect and remit tax if the volume of sales is sufficient to create “economic nexus.” The South Dakota statute established a standard for economic nexus to protect small businesses: 200 or more unique in-state transactions annually or aggregate annual in-state sales of $100,000. It is not clear if each state’s threshold will pass Constitutional muster. Nevertheless, state and local sales tax authorities are expected to be more stringent in their auditing of e-commerce businesses when they have evidence of taxable sales.
Consequently, documentation is now extremely important. Take for example a small business that sells its products through Amazon, for which Amazon collects sales tax. It is not sufficient for Amazon alone to report the sales tax to the state. Amazon must provide documentation to each seller utilizing its platform regarding the identity of the purchaser, where the sale occurred, what the products are, and whether or not tax was collected. Without such documentation, the seller could be held responsible on audit for the tax even if Amazon already remitted the tax. All sellers using third-party platforms need to review their marketplace facilitator contracts to understand how sales tax collection, reporting and documentation are addressed and whether changes are necessary.
There are software options available to help manage the implications of South Dakota v Wayfair, such as Avalara and TaxJar. However, in his dissent, Chief Justice Roberts warned that these tools are far from capable of carrying the sales tax compliance burden for small online businesses. Small and medium sized businesses engaged in internet sales should contact a trusted tax expert to review their sales and determine an appropriate system for their needs.
In the wake of this decision, four senators from states without sales tax have introduced federal legislation called the Stop Taxing Our Potential (STOP) Act of 2018. The legislation would relieve businesses in their states from the burden of collecting sales tax in other states. This initiative is not expected to draw further support. There is likely to be a push at some point to establish a national standard for economic nexus and supporting data collection but no single approach has emerged to date.
Moving forward it is important for small to medium businesses to ascertain the following:
- What are your sales in each state?
- Which states that you make sales in have passed economic nexus laws?
- Do you have “significant” sales (as defined by the particular state) in the states that tax remote sales?
- Do you or third-party marketplace facilitators already collect tax on your sales in those states?
- If not, when do economic nexus laws become effective in the states you have sales in?
- Do you have or can you get the information you need to comply with any collection or reporting requirements?
If you have further questions regarding South Dakota v. Wayfair, or wish to discuss your business, please contact us. Our tax experts can help.