When should A remote seller collect tax? The aftermath of the wayfair decision

A&M Tax Advisor Weekly

WHAT DO YOU NEED TO KNOW?

The rules for when a seller must collect another state’s tax are changing

National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753

Quill Corp. v. North Dakota, 504 U. S. 298. A remote seller was obligated to collect a state’s use tax if it had the required in-state “physical presence.”

States began to reimagine “physical presence” with statutory and regulatory innovations.

South Dakota v. Wayfair, Inc., No. 17-494. The US Supreme Court’s recent decision has removed the “physical presence” requirement entirely.

1967
National Bellas Hess, Inc. v.
Department of Revenue of Ill., 386 U. S. 753

1992
Quill Corp. v. North Dakota, 504 U. S. 298. A remote seller was obligated to collect a state’s use tax if it had the required in-state “physical presence.”

2008
States began to reimagine “physical presence” with statutory and regulatory innovations.

2018
South Dakota v. Wayfair, Inc., No. 17-494. The US Supreme Court’s recent decision has removed the “physical presence” requirement entirely.

Congress may yet act to enact federal law that reinstates the old “physical presence rule” or establishes another type of “bright line” for requiring remote sellers to collect tax. In the meantime, states and remote-sellers now face a brave new world, where the “physical presence rule” no longer exists and decades of case law and administrative rulings are of little or no guidance. While the final acts in the Wayfair saga continue to play out in the South Dakota Supreme Court, many observers expect the South Dakota economic nexus law which was partially tested in Wayfair to be held constitutional. In anticipation, almost half the states have already passed economic nexus legislation that will force a reckoning for different types of sellers to this “Wayfair Hangover.”

HOW WILL IT AFFECT YOU?

This decision will affect all types of remote sellers but will likely impact entrepreneurs and small to medium enterprises (SMEs) most heavily.
Individual states have always decided what and how much to tax, but the rules for when a remote seller must collect a state’s tax from an in-state customer have been controversial over many decades. With the Wayfair decision, one more barrier to a state’s ability to reach a remote seller has now been swept away. Inevitably, most if not all states may eventually impose legislation which enables enforcement of collection of state tax by remote sellers, a move expected to substantially increase their respective state revenues. These are the key questions every company should be asking themselves right now:

Is it time for the company to revisit its ASC 450-20 analysis?
Does the Company have reliable sales transaction data by customer location, and for those sellers who are digital products sellers or providers, will additional consideration around the seller’s transaction-sourcing methodologies be required?
Has the Company already considered its state nexus profile for other tax types for which the facts gathered may be useful as a starting point for understanding a Company’s potential use tax nexus in non-registered states?
Has the company compared its sales transaction data to the sales thresholds in the South Dakota use tax nexus statute and states with similarly designed use tax nexus statutes?
Does the Company need to develop systems and procedures to accommodate collecting tax in other states?

WHAT CAN A&M Tax DO FOR YOU?

There are more developments to be expected from the Wayfair case. US Congress could act and in effect, challenge the South Dakota vs. Wayfair ruling or the decision could be deemed constitutional. Either way, these impacted companies should start preparing for either outcome.

With Alvarez & Marsal Taxand’s multiple locations across the country, our team is fully equipped to guide and support companies as they navigate the possible taxation on e-commerce sales by assisting with:

To learn more about our services, visit: https://www.alvarezandmarsal.com/expertise/tax