States May Use Economic Nexus to Impose Sales Tax Collection

A Guest Blog Post by Moss Adams

On June 21, 2018, the US Supreme Court overturned South Dakota v. Wayfair, Inc., reversing the long-standing physical presence nexus standard for sales and use tax.

The case was South Dakota’s challenge to the physical presence nexus standard established by the US Supreme Court’s 1992 decision in Quill v. North Dakota, which required that a seller have a physical presence in a state before a state could require a seller to collect and remit sales and use tax.

Unlike the Quill case, the court didn’t consider the imposition of sales and use tax on remote sellers to be burdensome or discriminatory due to the following aspects:

  • The law requires that a vendor have either $100,000 of sales or engage in 200 transactions into the state.
  • The law is not to be retroactively applied.
  • South Dakota’s membership and compliance with the Streamlined Sales and Use Tax Agreement protects small vendors from undue burdens.

Why It Matters

As of June 21, 2018, states can potentially use the economic nexus standard established in Wayfair to require remote sellers to begin collecting and remitting sales and use tax. However, we anticipate that most states will give further guidance before requiring immediate and ongoing collection.

Remote sellers will be faced with increased burdens, including:

  • Determining the taxability of their products and services in multiple jurisdictions
  • Registering in numerous states
  • Setting up new systems and processes to comply with the new rules

Implications

In 2016, the South Dakota legislature enacted Senate Bill (SB) 106, which required sellers meeting certain criteria to collect and remit South Dakota’s sales tax without the seller first being physically present in the state.

Since then, several states, including Alabama, Tennessee, Vermont, Massachusetts, and Washington, expanded their sales tax nexus provisions to eliminate a physical presence requirement and create an economic nexus standard. Several states have pending legislation to adopt a similar economic nexus standard, and others are expected to propose such legislation. The court’s decision in Wayfair allows for these states to begin enforcing many of these economic nexus rules.

Even in states that don’t have economic nexus rules, remote sellers may also still be subject to a state’s mandatory reporting requirements—or potentially face significant penalties  if they fail to do so.

We’re Here to Help

To discuss whether this development may impact your business contact a Moss Adams tax professional by emailing statetax@mossadams.com.