When most people hear the word “Wayfair” they think of the catchy jingle and the online store.
Business owners think of something quite different. Or at least they should.
Last year, a hallmark case reached the U.S. Supreme Court. South Dakota v. Wayfair decided by a close (5-4) ruling that may dramatically change the way in which small businesses collect sales tax.
In that decision, the Supreme Court determined that states may charge tax on purchases made from out-of-state vendors, even if the vendor does not have a physical presence in that state.
Wayfair overturned previous law, adjudicated in 1992 (two years before Amazon even existed!). It’s not surprising that states have wanted to overturn the previous law; online sales have grown enormously since 1992, and the office of Government Accountability estimated $13 billion in sales tax was uncollectable in 2017 alone. And with state and local governments relying on sales tax to provide as much as 1/3 of their revenue, Wayfair could create a huge windfall.
This ruling has been called both sweeping (for its impact) and vague (due to its lack of clarity on definitions).
With Wayfair a reality, at least for now, e-commerce businesses need to determine whether they must charge tax on sales made in a state where they may not have a physical presence.
Let’s take a look at how your business may be impacted by Wayfair.
IT’S ALL ABOUT “NEXUS”
Nexus is a term you’ll hear often in the discussion of the Wayfair decision. Put simply, nexus is the connection between a taxing jurisdiction (such as a state) and an entity (such as your business).
There must be a connection – a “nexus” – to trigger collection of internet sales tax.
The determination of nexus lies with the U.S. Constitution, and its Due Process Clause. That clause requires a definite link or connection between a state and the entity it wants to tax. The Constitution’s Commerce Clause further requires “substantial presence”.
While a physical presence in a state obviously shows a connection (a nexus) that would trigger taxation, in Wayfair, it was determined that a physical presence was not required and that a nexus could be something other than your business’ physical presence in a state; in other words, a substantial presence could be created in other ways.
HOW NEXUS IS DETERMINED
Unfortunately, there is no shared or specific definition of nexus in use by all 50 states. As a business owner, this means you need to look at each state individually. It also requires you to stay on stop of changing regulations on both a national and multi-state level.
Many states are using the following as guidelines for determining nexus (note, this is not all-encompassing):
- “Maintaining, occupying, or using permanently or temporarily, directly or indirectly or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.”
- “Having a representative, agent, salesman, canvasser, or solicitor operating in this state under the authority of the retail or its subsidiary on a temporary or permanent basis.”
- “Any seller which does not have a physical presence in this state shall remit sales or use tax, if the seller meets either: 1. Gross sales from the sale of taxable items delivered in this state exceed $100,000; or 2. The seller sold taxable items for delivery in this state in 200 or more separate transactions.”
Other triggering events could include trade show attendance, affiliate relationships, or training in the state in question. I’ll be talking more about this in a future post.
Because South Dakota v. Wayfair established a level that would be considered acceptable to Federal courts in terms of constitutionality, many states have chosen to set the nexus thresholds as $100,000 in sales or 200 separate transactions. However, the rules vary widely from state to state, and each state has the right to set their own thresholds on sales.
And of course, it’s not quite that simple. This data is just the starting point for one possible method of determining nexus.
In my next post, I’ll focus on the implications and obligations that new nexus considerations will place on small business.
In the meantime, if you have questions about the Wayfair decision, determining nexus, and how this could impact your business please reach out. I’m skilled at solving these challenges for my clients.
Disclaimer: This blog and the linked videos are intended for educational purposes and should not be taken as legal or tax advice. You should consult with your financial professionals about your unique financial situation before acting on anything discussed in these videos. Clara CFO Group, LLC is providing educational content to help small business owners become more aware of certain issues and topics, but we cannot give blanket advice to a broad audience.