On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair, overturning the long-standing standard of when a state can impose a tax burden on a business. The case has garnered a lot of attention in the media, as it has drastic implications for eCommerce and other remote sellers who may soon face a profoundly different map of where their tax liabilities lay. For all the details of the case, head over to the Sovos resource center.
After Wayfair, remote sellers are (or should!) reviewing where they are doing business, and where they may soon have a tax liability. But with the media deluge, there is a tremendous amount of confusing, even contradictory, information out there. As such, we have set out to clearly explain this new world of sales tax compliance by examining the current landscape of states poised to impose tax liability on remote sellers, when those rules may come into effect, and what remote sellers should be aware of with these new rules.
But First, What Did Just Happen?
In a nutshell, in Wayfair the Court both reaffirmed that a state cannot impose a tax liability on a business unless that business has a sufficient connection – a “nexus” – with the state, while also overturning the decades-old doctrine that that “nexus” required the business to have a “physical presence” in the state.
While the Court refrained from establishing a new definition for nexus, the majority opinion did speak very favorably of the South Dakota law at issue, indicating that that was the type of law it would likely deem valid if the Court were to rehear the case. (The Court did not actually provide final resolution to Wayfair, but remanded the case down to lower courts to evaluate the South Dakota law without the physical presence definition of nexus getting in the way. However, with the Court’s glowing review of the South Dakota law, it is very unlikely that a lower court would rule against the state.)
In effect, this sets states up to establish new policies regarding nexus. The prevailing versions follow the South Dakota bill, establishing an “economic” nexus based on a business selling over a certain threshold of annual revenue or individual transactions in the state.
There is a lot to the Wayfair case, which could easily overwhelm this post. As such, we encourage any reader interested in better understanding what happened to read through our other posts, available here.
How Are The States Reacting?
Pretty much ever since the physical presence standard for nexus was last reviewed by the Court in the 1992 case, Quill v. North Dakota, states have worked to stretch and buck that restraint. This effort picked up in the last decade as states determined they were losing out on millions, and then billions, in tax revenue from “tax-free” online retail.
South Dakota may have been the privileged state to get its economic nexus law before the Supreme Court, but it is hardly alone in having such a law in its books. Prior to the passage of the South Dakota bill in 2016, several states already had similar laws, which had been tied up in court. And while South Dakota was in litigation, many other states passed their own economic nexus laws.
However, just because some of these states seem to be imminently poised to require sales tax collection from many remote sellers, this does not mean that remote sellers should panic.
What Do The State Rules Look Like?
For your convenience, we have put together an infographic summarizing the following information, which you can access here. For those who prefer words, or just like getting extra detail, we encourage you to read on.
By and large, each of the current state laws establishing nexus follow the same pattern: businesses are required to begin collecting and remitting sales tax on their sales into the state only if they reach a certain threshold of annual revenue or individual transaction in the state. For South Dakota, these thresholds are $100,000 in revenue or 200 separate transactions. No other state currently has a lower threshold, with some having higher levels.
Almost every state also does not impose retroactive tax obligations. The exception is Hawaii, which says it intends to look back 2-years for tax collection. The Supreme Court in Wayfair looked rather poorly on the issue of retroactivity, though it did not specifically say that a state law applying retroactive tax collection would inherently be invalid. If other states pass laws with retroactivity, that could be an issue future courts will need to weigh in on.
Since the Supreme Court’s majority opinion spoke so favorably of these limits, it is very likely that these, and other similar future laws, will become enforceable by the states.
When Do These Rules Come Into Effect?
For the first category of state laws, those currently being delayed by litigation, the answer is unknown. Previous courts had relied on the physical presence doctrine to strike down economic nexus laws. With the Supreme Court’s approval, these cases could potentially be quickly disposed of now. But there could be further considerations that could still delay these bills; courts can be fickle that way. It is even possible that these courts may still find that the states’ established thresholds do not constitute nexus, despite the Supreme Court’s favorable language. (Though unlikely, such a ruling could throw a major monkey wrench into the rollout of economic nexus laws.)
States whose bills are currently delayed by litigation are: Alabama, Indiana, South Dakota, Tennessee, and Wyoming.
The second category of state laws, those that are set to go into effect later in the year, seem to be in firmer footing. There is (as yet) no court challenge to these laws, so no clear impediment to their enforcement. The states need to get set up to begin enforcing these economic nexus rules (such as licensing remote sellers and finalizing some details), but they have given themselves time to get prepared. Remote sellers should be aware of these states and pay attention to any notices or news that comes from these states regarding their potential tax liability.
States whose bills are set to become effective later in 2018 or 2019 are: Connecticut (Jan. 1, 2019), Georgia (Jan. 1, 2019), Illinois (Oct. 1, 2018), and Iowa (Jan. 1, 2019).
The third category of state laws, those that seemingly will become effective on July 1, 2018, are certainly the most alarming, as there is very leadup time for businesses to get prepared. However, that also means there is very little time for the states to get prepared. When we looked into these states, many of them have indicated that they actually or are likely to delay implementation to a date after July 1.
, as it is the next date following the Wayfair decision that is the beginning of a tax period. As said above, many of these states have indicated that they are actually delaying implementation or intend to examine the issue again before implementing it.
States who bills indicate that they can become effective on July 1, 2018 are: Hawaii, Kentucky, Louisiana, Maine, Mississippi, North Dakota, Ohio, Rhode Island, and Vermont.
Of these, Hawaii, Kentucky, Louisiana, Ohio, and Vermont have not yet issued any official statements, not even comments to the press, indicating how they will proceed. It is these five states that remote sellers should pay immediate attention to. While it is by no means certain that any of these states will actually begin enforcing their economic nexus laws on July 1, 2018, it is always best to be careful and pay close attention to one’s potential tax liability.
Again, for a summary of state economic nexus laws and their effective dates, we have an infographic available here.
How Will Other States React
These are still very early days for economic nexus. As of the writing of this post, the Wayfair case is barely a week old. So it is rather difficult to know what exactly what the future holds.
But it is extremely likely that many more states will follow South Dakota’s lead and pass their own economic nexus laws. For years, states have complained of missing tax revenue from untaxed sales by remote sellers. Now that the doors have been opened to a whole new world of sales tax regulation states will almost certainly want to act on that.
With the guidance of the Supreme Court, they will also likely copy the South Dakota law directly and establish annual thresholds of around $100,000 in revenue or 200 separate transactions. They will also likely not make these rules retroactive (the Texas Attorney General issued such a statement on June 27). Any deviation to a lower threshold, or adding retroactive tax liability, could be grist for further litigation, which states would want to avoid.
The Wayfair decision overturned 50 years of sales tax compliance doctrine, and it will take time for the dust to settle. Indeed, the rules regarding what constitutes nexus are as ambiguous as they’ve ever been, and it’s possible that some state will think of an alternative definition of nexus even to the economic standard (though that is unlikely in the near future).
In this unsettled world, there are two pieces of advice that remote sellers would do well to follow: Constant Vigilance! and Don’t Panic! It’s neither wise to be an ostrich with its head in the sand nor Chicken Little – there is a middle ground of measured caution.
Don’t get caught napping as states introduce new sales tax regulations in the wake of South Dakota v. Wayfair. See how Taxify by Sovos can help your business stay on top of any new rates, forms, or requirements in every jurisdiction.