There’s little doubt your e-commerce clients will feel the impact of the Wayfair decision, but as the states either introduce or dust off their economic nexus rules for remote sellers, one area where the state rules diverge is their measure of economic thresholds.
Economic nexus allows the states that embrace it to compel vendors from other states to collect their state sales taxes; previously, they could not be similarly compelled under the physical presence standard
The recent U.S. Supreme Court decision in the South Dakota v. Wayfair case opened the door for states to broaden the reach of their sales tax net. The new focus on in-state revenues versus in-state physical presence means many retailers that previously were not compelled to collect remote state sales taxes must now do so.
For good reasons, the Court’s adoption of sales tax economic nexus is a crucial element. This is the legal concept under which a state can obligate a vendor in another state to collect its state sales taxes on sales made to customers inside the state, based on the amount of business the vendor conducts within the remote state.
Remember that the challenged law in Wayfair was a South Dakota law applying economic nexus principles to sales taxes. In 2016 when the law was passed in South Dakota, it was unconstitutional on its face. Now, according to the June decision, it is very likely a constitutional law and may be enforced.
In the decision, the Court stated: “The law at issue requires a merchant to collect the tax only if it does a considerable amount of business in the State.” Under the South Dakota law, a remote vendor is only obligated to collect state sales taxes if it sells more than $100,000 to South Dakota customers annually, or conducts more than 200 separate transactions with customers in the state each year.
Measuring the Economic Nexus Threshold
Understanding the measure of an economic nexus threshold is important for any vendor, particularly those making taxable retail sales. However, some states’ chosen language in describing the measure of their economic nexus thresholds should give some pause to other sellers as well.
For example, the South Dakota law from Wayfair describes the $100,000 threshold as consisting of “gross revenues from the sale of tangible personal property, any product transferred electronically or services delivered into South Dakota.” The law does not specifically define the term “gross revenues.” Note, though, that the state defines a “retail sale” as any sale for any purpose besides resale. The state’s choice to use gross revenues in its economic nexus law instead of retail sales illustrates that the measure of the law’s threshold is likely intended to include more than just taxable retail sales.
In describing its state sales tax base, South Dakota statute defines “gross receipts” as “the total amount or consideration, including cash, credit, property and services, for which tangible personal property, any product transferred electronically or services are sold.” Intentional or not, a reasonable reading of the South Dakota economic nexus law leaves the impression that, whether they are taxable sales or not, most sales made to this state’s customers are included in the measure of the state’s new economic nexus threshold.
Every day, sales are made in commerce where no sales tax is due. In addition, many of those are sales for resale. If the measure of a state’s economic nexus threshold includes sales for resale or other non-taxable sales, wholesalers and other vendors may find they have an obligation to comply with state sales tax rules even where they have no obligation to collect tax on the sales they make, especially maintaining the documentation required to support sales made tax-free for resale.
Over time, more states will provide more clarity and, hopefully, add some meat to the bare bones economic nexus laws and rules they currently promulgate. In the meantime, a reasonable reading of many state economic nexus rules indicates these states may be casting a broad net in qualifying revenues for threshold purposes. These include Connecticut, Hawaii, Iowa, Illinois, Indiana, Kentucky, Louisiana, Maine, Michigan, Mississippi, North Carolina, North Dakota, New Jersey, Ohio, South Carolina and Utah.
Wholesalers should consider a future where the collection, verification and management of resale exemption documentation becomes a multistate obligation. Many states are not terribly generous in allowing for resale or other exemptions to pass audit unless proper, valid and applicable documentation is in the hands of the vendor at the time of the sale.
For large wholesalers, automating the exemption documentation acceptance and application process makes sense – with or without economic nexus rules – to prevent misuse of documents and mitigate risk. The result is that any wholesaler, regardless of size, should take this opportunity to examine its resale documentation management’s current condition and implement improvements, where necessary, to its people, processes and technology to ensure a seamless, risk-averse exemption documentation function.
About Shane Ratigan
Shane is a Senior Manager in the State and Local Tax Department at Clark Nuber, P.S. in Bellevue Washington. Shane focuses on state and local indirect tax obligations for companies of all sizes operating across the United States and beyond. He collaborates with companies in developing scalable processes to support effective and dynamic indirect tax calculation and compliance, especially sales and use tax.