purposes, which means states can now require out-of-state sellers with any substantial nexus within a state to collect and remit sales taxes, without regard to physical presence in that state. This affects companies selling online.
The Commerce Clause and Due Process Clause of the U.S. Constitution limits states’ ability to impose sales tax collection obligations on sellers. A minimum connection between a state and the person, property or transaction it seeks to tax is required before a state can require a seller to collect and remit sales tax. The Court’s decision in Wayfair lessens these previous protections making it easier for states to impose sales tax on out-of-state companies.
Highlights of South Dakota Statute
The Court underlined three features of South Dakota’s economic nexus law that weighed in favor of upholding it:
- the state law provides a safe harbor for small merchants;
- the law is not retroactive which reduces the likelihood of double taxation; and
- the state is a member of the Streamlined Sales and Use Tax Agreement (SSUTA).
SSUTA is an agreement between states and businesses that contains numerous simplification and uniformity requirements states must adopt to remove or reduce compliance costs and administrative burdens on sellers. The Wayfair ruling is “an endorsement of simplification.” As a result, non-streamlined states with complex sales tax systems are now considering mirroring South Dakota’s nexus law.
Currently, including South Dakota, there are 24 members of the SSUTA. Using the SSUTA system, a seller can register in all member-states in less than 10 minutes! Because of this simplification, companies need to be on guard against states’ efforts to increase collection.
While Wayfair ruling may make it easier for states to enforce collections from out-of-state sellers, the physical presence nexus or other nexus policies may still be used in instances in which the economic nexus thresholds are not met or in states that do not embrace the economic nexus law.
It is important to note that states are changing their requirements for out-of-state sellers on an almost daily basis and that there are complex distinctions made in approximately 10,000 state and local taxing jurisdictions across the nation. There are states that pursue other nexus models in lieu of the physical presence standard.
What Should You Do?
If you are selling in other states and/or online, your next steps should include:
- Reviewing your existing activities and the geographic footprint in terms of the number of transactions and monetary value.
- Monitoring state and local sales/use tax updates, including further action on the Wayfair case.
- Identifying the nexus standards for the state and if registration is required.
- Finding out if your sales are taxable or exempt in the state.
- Determining if the state taxes services or digital goods or other intangibles. Some states limit their taxes to sales of tangible personal property.
- If sales are exempt, ensure proper exemption documentation is collected, retained, and regularly renewed.
- Determining if the state is a member of the Streamlined Sales and Use Tax Agreement (SSUTA).
- Determining what taxes are applied within the state (e.g., single statewide rate or multiple local rates).
- Determining the reporting and payment requirements for the state. Is e-filing or electronic payment required?
- Considering hiring a state and local tax professional to file monthly sales and use tax return on your behalf, if preferred.
- Preparing for increased audit activity by state and local taxing jurisdictions.
Being proactive on these changes can prevent you from being subjected to stiff fines and penalties later.