Happy Anniversary, South Dakota v. Wayfair!

As the sixth anniversary of the Supreme Court’s South Dakota v. Wayfair decision draws near, it is a good reminder for companies to review their sales tax nexus footprint and evaluate any resulting sales tax obligations.

The Wayfair decision turned the sales tax world on its head in the summer of 2018, reversing decades of history related to sales tax nexus and a retailer’s obligation to collect and remit tax when it sold products across state lines. Disavowing the old physical presence requirement established by Quill, the high court’s ruling opened the door for states to impose an economic nexus standard when it comes to sales tax collection responsibilities.

Within the first six months of the Wayfair decision, 30 of the 45 states with state-wide sales taxes had adopted some version of an economic nexus standard. As of today, 45 states, Alaska’s local sales tax jurisdictions, and Washington, D.C., have enacted economic nexus thresholds. While there are variations by state, the vast majority of the sales tax economic nexus standards are based on $100,000 or more of gross sales into a state.

Defining Nexus

With the focus on economic nexus, companies should not lose sight of the traditional physical presence nexus standard. Physical presence in a state can include such minimal contacts in a state as a salesperson’s temporary visit to a customer, a remote employee working from a home office, or inventory held in a third party’s warehouse. Taxpayers have been known to claim no nexus or sales tax collection responsibility if sales into a state have yet to eclipse an economic nexus standard – while maintaining an employee in the state. But it is important to remember that the employee or payroll alone can create nexus, regardless of the sales into the state.

Consequences of Failing To Comply

Businesses that establish physical presence or economic nexus and don’t fulfill sales tax obligations could suffer any or all of these consequences if discovered by the state:

• Payment of taxes that should have been collected. The state will likely hold sellers accountable for sales taxes they were required to collect but didn’t. Generally, sellers won’t be able to go back and collect from customers or find out whether the customers self-assessed use tax on the sales.
• Penalties and interest. States and localities can impose penalties and interest as a function of the sales tax that was not collected but due. Businesses with substantial multistate activity can be hit hard.
• Due diligence concerns. When a business becomes a party to a possible merger or acquisition, any noncompliance with sales tax rules will likely be discovered during transactional due diligence efforts. This could mean a variety of issues, from changes in valuation to unfavorable indemnification clauses, and, in some cases, a buyer looking elsewhere.

In the age of “big data,” states can identify inbound sales activity in many ways businesses don’t realize. Some states have contracted with vendors to identify out-of-state sellers who exceed its economic nexus thresholds by purchasing credit card information that details sales into the state. Furthermore, state tax reporting databases are becoming increasingly more thorough with the ability to identify potential new sales tax collection requirements by connecting a FEIN or state tax ID from a payroll or property tax report. Not to mention the tried-and-true methods that have driven states’ sales tax enforcement, such as:

• Audits of customers or vendors. A review of invoices as part of a use tax examination can start an investigation into the full extent of sales tax responsibilities of other businesses.
• Perusal of websites. States’ employees may browse unregistered business’ websites, place items in shopping carts, and begin the checkout process to see if tax is charged on the shipping address into the state.
• Review social media. States may peruse a target business’s social media platforms and see a marketing photo of salespeople at a customer’s location in the state, or watch specific hashtags when large tradeshows are in town.

An Ounce of Nexus Prevention

Given the risk involved in multistate sales tax compliance, it is prudent to analyze potential exposure to out-of-state tax liability on a regular basis. Businesses should also monitor new activities and plan to identify potential nexus issues before they become overwhelming or deal-breakers. For businesses selling into more than a handful of states, that could mean implementing or enhancing sales tax compliance software, which  automates the compliance function.

If you haven’t reviewed your sales tax nexus footprint in a while, now is the time. Pass the Wayfair anniversary cake!

KSM’s State & Local Tax Group follows legislative activity across the country. If you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or complete this form.