Now that the Supreme Court has overturned Quill and has ruled in favor of South Dakota, we have received many questions regarding the implications of this decision. We tapped into our Chief Tax Office to help answer some commonly asked questions.***
Q: What did the Supreme Court decide?
A: The Supreme Court handed down their decision in favor of South Dakota, which overturns Quill and the longstanding physical presence requirements for sales and use tax collection for remote sellers, out-of-state merchants, and global companies selling to U.S.-based customers.
Q: What was the South Dakota v. Wayfair case about?
A: In 2016, South Dakota passed a law requiring remote sellers to register, collect, and remit sales tax if they meet the following criteria:
- $100,000 of annual gross revenue from the sale of tangible property, electronic products or services delivered into South Dakota; or
- 200 separate transactions per year in which there is a sale of tangible property, electronic products, or services delivered into South Dakota.
On June 21, the Supreme Court ruled in favor of South Dakota and overturned Quill. The Supreme Court viewed that these types of thresholds help to prevent discrimination against different size businesses from undue burdens on interstate commerce. States that do not already have similar thresholds in place will need to determine how to apply the new nexus standard.
Q: How does this change remote sellers’ sales tax collection responsibilities?
A: The existing compliance burden will likely escalate significantly. Many companies have physical nexus in only a few states. By overturning Quill, companies could be required to collect and remit sales tax in up to 45 states. As a result, some companies may need to invest in new technology and processes.
Q: What types of businesses will this affect?
A: Any business that sell goods remotely could be affected.
Q: What should businesses be doing now?
A: Prepare for increased collection and remittance responsibilities by:
- Starting to gather data on gross revenues and/or the number of transactions that occur within states where the company sells remotely.
- Prioritizing states where the company has the greatest economic presence and creating a plan to register to collect and remit sales tax (e.g., via a marketplace, or with a hosted, or cloud-based, technology solution).
- Evaluating the financial statement impact of remote seller compliance.
- Reviewing invoicing processes and controls, as invoicing errors that occur after the decision is finalized likely will result in more significant customer satisfaction and cash flow risks.
Q: Who can you turn to for automated tax solutions?
A: Vertex is prepared to support you.
Vertex tax technology is proven and ready to accommodate any new calculation and reporting requirements following the Supreme Court’s decision to overturn Quill. Vertex provides cloud and on-premise solutions that can be tailored to specific industries for every tax type. For companies that may need to rapidly implement a solution, Vertex® Cloud Indirect Tax could be the best option. Vertex Cloud is a SaaS solution that automates end-to-end sales and use tax processes from calculation to returns and remittance. With multiple services levels and flexible pricing models, Vertex Cloud meets the sales and use tax needs for businesses of all sizes. Vertex also offers over 120 integrations to major providers of e-commerce, procurement, CRM, ERP and other major financial systems.
Q: How is the application of a home-state certificate (in a resale situation) to other applicable states now affected by the Wayfair ruling?
A: You should be obtaining valid resale certificates as if you have been subjected to the physical presence test. Multi-state certificates are acceptable and can be obtained from the state you are selling in.
Q: How will wholesalers and manufacturers who sell into other states (via catalog, phone, email, or U.S. mail) be affected by this ruling?
A: If a business meets the nexus thresholds, regardless of whether sales are exempt or subject to tax, the business should register within that state. This ruling is applicable to all transactions regardless of method of sale. Wholesalers may not be subject to collection and remittance requirements due to the nature of their business; however, they may have additional filing and reporting obligations.
Q: How are businesses that are located or headquartered in the NOMAD states (states that don’t charge sales tax such as New Hampshire, Oregon, Montana, Alaska, and Delaware) impacted by the Wayfair ruling?
A: Businesses in the NOMAD states are subject to the same rules as businesses in other states and will be required to collect and remit to those states if their economic nexus thresholds are met.
Q: Should companies register in all jurisdictions within the Home Rule States or is it sufficient to just collect tax at the state level?
A: It is likely that Home Rule States will pass enabling legislation requiring remote sellers to collect and remit at the sub-state jurisdictional level. Sellers should expect to collect and remit at all government jurisdictional levels in Home Rule States.
Q: How are states that are members of the Streamlined Sales and Use Tax Agreement (SST) impacted by the ruling?
A: Companies can still use the SSTs to file tax returns, yet the SST agreement is not applicable to every state.
Q: Are businesses that only have tax-exempt sales affected by Wayfair?
A: Exempt sales still count toward the economic thresholds even though no sales tax is required to be collected and remitted. Therefore, a seller may still have to obtain resale certificates for those sales.
Q: Does the Wayfair ruling affect internet sales only?
A: This ruling is applicable to all transactions including those made via the internet, catalog, phone, email, or U.S. mail.
Q: If a service (i.e. professional services such as architects, law, IT, accounting, consulting) is subject to sales tax, does that count toward the economic nexus threshold?
A: The economic threshold applies equally to the sale of goods and services. Services may become an expanded part of the sales tax base, so it's important to be mindful of sourcing rules around services. Generally, services will be sourced for sales tax purposes to the location that benefits from the services and not from the location where the services are performed.
Q: Will the economic threshold apply from the first dollar after $100,000, the 201st transaction or from $1?
A: Once the thresholds are crossed for a state’s measurement period, you must register and begin collecting at the beginning of the next taxable period. If a business exceeds the thresholds mid-year, they must register and begin collecting at the beginning of the next taxable period. For example, South Dakota uses a calendar year measurement - if businesses cross the threshold in 2018, they must begin collecting and remitting Jan 1, 2019. Make sure to check the state statutes for regulations for when the effective date of reporting is required.
Q: What if a seller is above the thresholds today, but then sales drop below the required levels.
A: This is dependent on each state’s economic threshold requirements; however, in the case of South Dakota, the state expects remote sellers to continue to collect and remit despite falling below the thresholds.
Q: Is the economic threshold based on the calendar or fiscal year?
A: Measurement periods vary from state to state. Some are calendar year and therefore not tied to an organization’s fiscal year reporting period.
Q: If a seller collects sales tax, but does not meet the state threshold, are they required to refund each customer the tax collected?
A: For South Dakota, if a remote seller meets the thresholds in the calendar year 2018, it must collect and remit on transactions starting January 1, 2019. If during 2019 the thresholds are not met, the seller would not be obligated to refund that tax.
Q: As part of the registration for sales tax, do we have to register with the secretary of state as well?
A: You should expect that once you start filing tax returns, you may receive requests from the state to file additional reports (i.e. from the secretary of state).
Q: If a company sells through a third-party marketplace, who is responsible for reporting and remitting the tax?
A: Within the states that have marketplace facilitators legislation (i.e. Washington), the marketplace would be responsible for collecting and remitting; otherwise, the remote seller is responsible for collecting and remitting sales tax.
Q: Why would states persist in “click-through,” “cookie” and “affiliate” nexus rules – that have yet to be tested in court – when they could instead follow Wayfair?
A: If states are looking to quickly expand their tax base beyond the physical presence test, Wayfair is the fastest path to do so. States that presently do not have economic threshold legislation will need to pass enabling legislation.
Q: Will remote sellers need to collect and remit local taxes or just to the state?
A: Sellers should expect to collect and remit at all government jurisdictional levels.
Q: Does the Wayfair case impact income tax?
A: The Wayfair case only affects the physical presence tests for sales and use tax. Generally, for income tax, the physical nexus remains. We expect there will be quite a bit of commentary over the next couple of months that may link Wayfair to income tax.
Q: How will states enforce collection from foreign sellers?
A: The Wayfair decision doesn’t apply to just U.S.-based companies; U.S. states also have the right to require foreign companies to collect and remit sales tax if economic nexus thresholds are met. States could enforce compliance by pursuing registered agents of the foreign company or placing a tax lien on the non-compliant company’s U.S. bank accounts or any other domestic online payment system.
***These FAQs are provided solely for educational purposes, without any warranty as to the accuracy or completeness of the information included in this presentation. These FAQs are not intended to and do not constitute tax advice or legal advice. Always consult a qualified tax or legal advisor before taking any action based on these FAQs.