The Supreme Court’s ruling in South Dakota v. Wayfair, Inc. opened the door to a whole new level of complexity in state and local sales tax compliance. Even before this landmark decision, states had become increasingly aggressive in interpreting physical nexus rules to hold remote sellers liable for collection and payment of taxes based on even the most tenuous of connections to a jurisdiction. Once the Supreme Court upheld South Dakota’s creation of an economic nexus standard, states that impose sales taxes scrambled to require out-of-state businesses to collect and remit taxes on transactions within their borders.
This post-Wayfair “gold rush” has created a hodgepodge of varying thresholds and requirements that makes multistate sales tax compliance substantially more complex than it was before the court’s decision. Businesses that operate across state lines face an entirely new landscape of sales tax obligations, and most will need a combination of software and professional support to avoid costly mistakes.
No federal standard for economic nexus
The Wayfair decision didn’t create a federal standard for economic nexus. The court simply ruled that South Dakota’s law didn’t create an unconstitutional burden on interstate commerce based on several criteria. One of those criteria is the law’s de minimis thresholds that excuse sellers from collecting taxes if they have less than $100,000 in sales or fewer than 200 separate transactions in the state during the year.
Some states have enacted laws that follow the South Dakota model on the assumption that it would be treated as a kind of “safe harbor” by the courts, but many have chosen to enact rules based on the reasoning of the court’s decision instead of the specifics of the law it upheld. This has led to significant differences among the states. For example:
- Annual sales thresholds range from as low as $100,000 to as high as $500,000 and transaction thresholds run from 200 per year all the way down to a state saying that economic nexus will be created with the first sale into the state each year.
- Some states hold that economic nexus is created when a business passes either the sales threshold or the transactions threshold, while others don’t impose sales tax obligations unless a business exceeds both.
- Some states measure transactions on a quarterly basis, some by current or preceding calendar year, and others have a set annual date to measure the last 12 months.
- All states have different effective dates for imposing a remote seller collection requirement.
- Many states have imposed marketplace facilitator laws, which impose tax on the company that facilitates an online sale, such as eBay, Etsy, or Amazon, rather than the marketplace seller –– however, the seller is responsible for maintaining verification the marketplace facilitator is collecting the sales tax.
Sales tax nexus complexity extends beyond just 50 states
The Wayfair economic nexus ruling means that remote sellers will likely be subject to sales tax obligations in additional states, but that’s just the beginning of the increased complexity. In many states, sales tax rules and administrative processes can vary by city, county, school district, or other subdivision. Many products are taxed differently in various jurisdictions. Items like medical supplies, clothing, food, and cloud-based applications might be exempt in some states, taxed normally in others, and subject to special rates elsewhere. The matrix of product-specific rules and state, county, city, and special jurisdiction rates can result in multiple different sales tax rate combinations in just one state.
Many local jurisdictions in Alaska and Colorado impose economic nexus provisions for local sales tax. These filing are separate from any statewide collection.
Sales tax nexus compliance: Next steps
If your business sells products or services into multiple states, the Wayfair ruling means that you’ll probably need to implement a software solution for sales tax compliance, or consider upgrading your system if you already have software in place. Many of the solutions available today connect with ERP systems and provide excellent support for calculating and complying with sales tax obligations in jurisdictions where a business knows that it needs to file.
Unfortunately, most programs fall short when it comes to helping a business figure out where to file and alerting users to law changes that may trigger new obligations. That’s why every business with transactions in multiple states should be consulting with a tax advisor to assess sales tax compliance needs and determine the best solution to meet them. An experienced sales tax professional can help you map out what you’re selling and where you’re selling it in order to set up your sales tax system correctly from the start. They can also support nexus evaluations and taxability determinations so that you know where you may cross a filing threshold in the near future.
To learn more about how your business can integrate knowledgeable, experienced professional advice with your sales tax software solution, please contact us today.
