Sales Tax Foundations
Part III: Basic Questions and Answers about State Sales and Use Tax: Constitutional Rights: Nexus under Quill and Wayfair
In our last blog, Part II: Basic Questions and Answers about State Sales and Use Tax: Taxable Persons, we focused on the second of our foundational sales and use tax topics — who is liable for sales and use taxes, aimed primarily at the non-tax specialist, who is often challenged by the complexities of sales and use taxation. In this blog, we ask and answer some basic questions about the topic — what is sales and use tax nexus after Quill?
Question 1: What is sales and use tax nexus?
In the state tax area, nexus is an important concern for companies that have a multistate presence because it is a threshold issue that must be evaluated to determine whether a business has tax filing and collection obligations in a particular jurisdiction. Tax nexus refers to the amount and type of business activity that must be present before the business is subject to the state’s taxing authority—so-called “substantial nexus.” State tax nexus considerations differ by tax type and jurisdiction and are subject to federal constitutional restrictions.
Until recently, the constitutional test of substantial nexus for sales and use tax purposes required an out-of-state seller to have a physical presence in a state before that state could require the seller to collect and remit sales and use taxes (Quill v. North Dakota (1992)). However, the recently decided Supreme Court case of Wayfair v. South Dakota has thrown out the Quill physical presence nexus standard.
Question 2: So if physical presence is no longer the constitutionally required nexus standard for sales and use tax liability in all states, what is the new standard?
It’s going to take a little while to figure that out for each state. While it is true that the Wayfair case overturned the Quill physical presence standard for all states, it left open to each state to decide what specifically replaces it within the guidelines of Wayfair. In South Dakota, this means that South Dakota state courts will now “redecide” whether the “economic presence” test of its law (S.B 106) will be the standard in South Dakota. It is very likely that it will become the standard in South Dakota.
But what about all the other states? Since the Court in Wayfair did not formally replace that standard with the “economic presence” standard for all states, each state will have to re-examine its current nexus laws, but this time, without regard to the now overturned physical presence standard of Quill. Although it remains to be seen what the states will actually do, it’s pretty safe to assume that all states will adopt the economic presence test along lines similar to the South Dakota statute, which specifically requires only a certain volume of economic activity measured by either amount or number of sales in the state.
Question 3: What happens to all those other nexus standards besides physical presence that have been enacted by the states prior to Wayfair?
It depends. Many of those laws were specifically made contingent on the Wayfair decision. So those would become law immediately. For example, online sales tax laws modeled after South Dakota’s law went into effect in Hawaii, Kentucky and Vermont on July 1. But other nexus statutes like “cookie nexus” do not necessarily have to go away if the states “see those statutes” as “supplementing” economic presence and not in conflict with Wayfair. One would need a crystal ball to figure out the permutations and combinations that revenue-starved states might come up with. They will have to be tracked very carefully indeed.
Question 4: How will my sales tax collection and remittance obligations in the various states change as a result of dropping the physical presence standard?
It depends on the vendor. Large remote sellers, like Amazon, are likely to see little change since they have been collecting tax in those states anyway. Smaller vendors are likely to have greater sales tax collection and remittance obligations. States will now have to write or revise sales and use tax nexus laws to reflect the absence of the physical presence standard. This means that vendors will continue to need legal skills and software solutions to track and interpret both existing and new state sale tax laws under the new Wayfair umbrella.
Read more on specific states with “economic presence” laws on the books.
The states below have legislation on the books that can be described as “economic presence” laws because they have some “volume of economic activity” requirement to establish nexus. However, many states have already announced that they will reviewing their statutes to determine whether they will need to have their terms amended to mirror the South Dakota law’s specific volume and other requirements approved in the Wayfair decision. Some states, like Hawaii and Vermont have July 1, 2018 effective dates and have already made announcements to use “catch up” procedures for transactions in 2018 before the Wayfair decision. Kentucky, on the other hand, has announced that taxes will be collected on a “prospective” basis. More clarity will be needed in all cases.