The tale of Oregon-based Mattress World, a delivery into neighboring Washington state and uncollected sales tax has become legendary.* And in the present sales tax environment, it’s become more relevant than ever.
As the story goes, some Washington state residents traveled south to Oregon in their quest to find just the right bed. They purchased the bed, sales tax free, but needed help getting it home. Mattress World hired a third-party vendor to deliver and assemble the new bed set in the buyers’ Washington residence.
Unfortunately, Mattress World unwittingly created sales tax nexus with Washington through the use of the third-party vendor, which it paid for and arranged. When a business has nexus in a state, it’s required to register with the tax department and collect and remit sales tax.
At the time, sales tax nexus-creating activities were largely linked to physical presence, like having an office, store or warehouse in a state. But unbeknownst to Mattress World, Washington had broadened the definition of physical presence to include third-party delivery services.
Had the Washington buyers retained the third-party delivery service themselves, the retailer wouldn’t have been legally required to collect and remit sales tax. Instead, and over time, Mattress World unknowingly racked up close to $2 million in unremitted sales tax, penalties and interest charges. Though it collected and remitted Washington sales tax once it realized it had to, the years’ worth of unpaid taxes were too great a burden and the company was forced to close.
A lot has happened since Mattress World shuttered in early 2012 — notably a June 2018 decision by the Supreme Court of the United States. In South Dakota v. Wayfair, Inc., the Supreme Court overruled the long-standing physical presence rule that prevented states from taxing most remote sales. It determined a business’s “economic and virtual contacts” with a state could be a sufficient basis for sales tax nexus.
After the Wayfair ruling, more than 30 states rushed to adopt economic nexus laws similar to South Dakota’s, which imposes a sales tax collection obligation on remote retailers with substantial economic activity in the state (more than $100,000 in sales or at least 200 separate transactions in the state in the current or preceding calendar year). More states will follow suit in 2019.
With so many states imposing new requirements on out-of-state businesses, there’s a high probability companies will find themselves in a position similar to the erstwhile Mattress World: unwittingly establishing sales tax nexus in one or more states.
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts and endeavors to make complex sales tax laws more digestible for both experts and laypeople.