Only a short time has passed since the U.S. Supreme Court handed down its ruling in South Dakota v. Wayfair, but states are already actively working to take advantage of the opportunities the decision brought.
A lot has already been said about Wayfair (which you can read here). In a word, the decision removed the decades-old standard that a business had to have a physical presence in a state for the state to be able to impose a tax obligation on the business. After Wayfair, businesses still need to have a “substantial nexus” in a state for it to impose tax obligations. While there is no specific definition of “substantial nexus” that is currently controlling, the idea of “economic nexus” – a certain threshold of sales made to a state in a year – has taken hold.
The Court’s apparent approval of economic nexus rules has left states open to expand their sales and use tax collection to a whole new class of businesses: remote sellers, particularly, online retailers. And indeed, in recent days, four states, Alabama, Hawaii, New Jersey, and Wisconsin, have all taken steps to begin requiring remote sellers to collect and remit sales tax in the coming months.
How Have States Been Responding To Wayfair?
Alabama actually had an economic nexus rule long before South Dakota. It, however, was held up in litigation, as it violated the same principles that were challenged, and overturned, in Wayfair. But South Dakota’s win at the Supreme Court appears to relieve the judicial pressure that was preventing Alabama from implementing its law.
As such, on July 3, 2018, the Alabama Department of Revenue issued guidance clarifying how it will proceed in the wake of Wayfair. In that guidance, the AL DOR states that it will begin enforcing its economic nexus law on sales made on and after October 1, 2018. From that date forward, remote sellers making more than $250,000 in annual sales to Alabama will be required to collect and remit sales tax to the state.
The DOR guidance also states that marketplace facilitators that make more than $250,000 in annual sales to Alabama will be required either collect sales tax on sales made by its third-party retailers or comply with notice-and-report requirements, similar to those first passed in Colorado.
This requirement will take effect on January 1, 2019.
In anticipation of the Wayfair ruling, Hawaii passed an economic nexus law on June 13, 2018. On June 27, 2018, the Hawaii Department of Taxation released an announcement providing guidance on how the state will now proceed with enforcing that economic nexus law.
The Hawaii economic nexus rule applies to businesses with either gross annual revenue exceeding $100,000 in sales made to Hawaii, or more than 200 separate annual transactions to the state.
While this economic nexus law only became effective on July 1, 2018, it actually has retroactive applicability (so far, Hawaii is alone in trying to look back to past sales made by remote sellers for tax purposes). As written, the law applies to sales made after December 31, 2017. Therefore, certain remote sellers – those who meet the $100,000 in revenue or 200 separate transaction thresholds for either calendar years 2017 or 2018 – may owe tax for sales made between January and June 2018.
Hawaii will allow those taxpayers who do now owe tax for sales made since January to report and pay the tax they owe on “catchup income” without penalty or interest due by paying in full on their next return or spreading their liability over the remaining periods of the current tax year. In order to qualify for this “catchup” payment period, the taxpayer must not have been licensed to collect and remit tax to Hawaii prior to June 12, 2018; must have lacked physical presence nexus prior to June 12, 2018; must meet the economic threshold for either 2017 or 2018; and have a tax year beginning between January 1, 2018 and June 30, 2018.
Remote sellers meeting the sales threshold in Hawaii should be aware of this added wrinkle when developing their plans to meet their tax obligations in the state going forward.
Unlike Alabama and Hawaii, New Jersey did not have an economic nexus rule ready to go with the Wayfair ruling. However, the state wasted no time at all in getting one together.
On June 23, 2018 – two days after the Wayfair ruling came out – the New Jersey legislature introduced AB 4261, which imposes sales tax obligations on remote sellers with either more than $100,000 in annual revenue or 200 separate transaction in the state (based off the South Dakota law, which received tacit approval from the Supreme Court, these thresholds are likely to be the gold standard for economic nexus).
Ten days later, AB 4261 had passed both chambers of the legislature, and was on its way to the Governor’s Desk for signature. This shows just how fast states are acting to take advantage of the new tax landscape created by Wayfair.
While AB 4261 has not yet been signed, there is every reason to believe it soon will be. It has an effective date of October 1, 2018, and will apply prospectively on all sales made after that date.
Notably, AB 4261 also requires marketplace facilitators to collect and remit sales tax for their non-collecting third-place sellers. Seeing how prolific online marketplaces are (such as Etsy, eBay, and the Amazon Marketplace), it is very likely that more states will seek to get the businesses who run them to collect tax, instead of going after their users, who will often fail to reach the threshold amounts. Indeed, states like Washington and Pennsylvania already have such laws on their books, which Amazon has determined it will comply with.
On July 5, 2018, the Wisconsin Department of Revenue announced that it will require remote sellers to collect and remit sales tax on their sales to the state beginning October 1, 2018. This is notable because Wisconsin currently has no statutory rules regarding economic nexus.
Instead, the notice reveals a different route that some states could take to impose economic nexus: regulatory rulemaking. This process avoids the problematic politics of passing legislature by relying on administrative bodies to draft regulations that set up new rules, while conforming with any controlling statutes.
As such, the recent notice states that the DOR will soon develop the rules under which it will obligate remote sellers to collect and remit sales tax – the October 1 date, then, is more of a heads up, that the department fully expects to have its rules in place by that date, even if they are currently unsettled.
Since the announcement remarked on the changes wrought by Wayfair, it is very likely that the DOR will create rules very much in line with the $100,000 in annual revenue or 200 separate transaction thresholds. Though, of course, the DOR could throw everyone for a loop and create its own standards.
What Does This All Mean For Online Retailers?
With the Supreme Court removing the physical presence standard, states may now feel unbridled to expand their tax collection, and online retailers are at the forefront of from whom states want to collect sales tax. These recent actions by states signal the breakneck speed at which they are reacting. Online retailers need to keep up to date on all the changes that states are taking so they do not get caught up flatfooted. The time is now to determine your tax nexus footprint and get your systems set up so you can remain compliant with all your tax collection and reporting.
View the onDemand webinar, South Dakota vs. Wayfair Supreme Court Decision – Live Q&A with Regulatory Experts to learn how the Supreme Court’s ruling will affect your eCommerce sales tax.