Wayfair Changes the State Tax Landscape Beyond Sales & Use Taxes and Retailers
The essential sales & use tax holding of the U.S. Supreme Court in South Dakota v. Wayfair, Inc., et al. [No. 17-494 (June 21, 2018)] is that physical presence is no longer needed in order for a state to require out-of-state retailers to charge, collect and remit the state’s sales & use tax on sales of products and taxable services delivered to in-state customers at least where:
- There is a sufficient statutory threshold of dollar sales or number of transactions that has been met, and
- The seller also has sufficient virtual contacts [such as apps, website cookies, leased data storage and targeting advertising] used to connect with in-state customers.
Although the context of Wayfair is large national retailers with high dollar sales and extensive virtual presence in many states, South Dakota’s relatively low $100,000 of sales or 200 transactions threshold applies to much smaller companies and even a website with a virtual showroom might constitute sufficient virtual contacts.
Apart from the Court’s holding regarding state sales & use tax collection for retailers, this decision has also changed the nexus landscape for other types of direct state taxes (at least in conjunction with state threshold legislation), including net income taxes, for service providers, manufacturers, wholesalers and retailers.
Prediction of What Will Happen Next
Many more states will likely enact new statutes or modify existing statutes that are the same or similar to South Dakota’s U.S. Supreme Court sanctioned (safe harbor) threshold of dollar sales or number of transactions for prospective sales & use tax collection [Louisiana has just done so] and probably also enact complementary threshold statutes for net income and other direct taxes.
However, the federal limitation of Public Law 86-272 remains in place for sellers of products against state and local net income-based taxes if in-state activities are limited to “solicitation”.
States may also expand their lists of specifically-enumerated services subjected to sales & use tax in order to tax more services performed outside of their borders but delivered to in-state end consumers.
Considerations of What to Do
Evaluate the specific facts and circumstances of your company’s multi-state business activities, particularly sales, in relation to existing and anticipated future state tax rules in sales-only states.
Clean-up any state tax exposure based on physical contacts (property, payroll and travel) for prior periods.
Be mindful of home-state statute of limitations for amended income tax return credits or deductions for prior year income tax paid to other states.
Consider structural modifications for certain direct taxes.
This newsletter is designed to highlight selected state & local tax developments and opportunity areas. Its contents should not be relied upon as a substitute for independent research and analysis as applied to specific facts and circumstances.