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Supreme Court's Wayfair Decision Rules Physical Presence Not Required To Collect Use Tax

Jennifer Kolterman, CPA

The U.S. Supreme Court ruled in South Dakota v. Wayfair, No. 17-494 that states can assert nexus for sales and use tax purpose without requiring a seller’s physical presence in the state. 

IMPACT TO YOU

The impact of this ruling is that your business may be subject to sales and use tax filing requirements in additional states.  More states will modify their sales tax laws to impose sales tax collection responsibilities on online retailers.  Therefore, please take these steps as a result of the Wayfair decision:

  1. Contact our firm to discuss the sales tax implications.
  2. Review business activities to determine obligations per state.
  3. Develop a plan for registering for sales tax compliance and filing the related returns.
  4. Determine the potential effects on your business.  This includes technology updates that might be needed, taxability study, and rate determinations by state, county, and city. 
  5. Set up procedures for keeping an eye on sales tax changes.  Tax rates, law changes and fulfillment practices should be monitored for changes.

EXAMPLE OF IMPACT

California company sells product to customers in the US and only files California sales tax returns as it had no physical presence in other states.  If other states follow South Dakota’s law, the company will need to file returns and collect sales tax in additional states as this company is a remote seller. 

ADDITIONAL INFORMATION

As a practical matter, this ruling did the following:
  • Overturned the historic sales tax cases Quill Corp vs North Dakota and Bella Hesse Inc vs Department of Ill. 
  • States are empowered to impose sales and use tax collection obligations on remote sellers, subject to the four-prong test of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), which (among other things) requires a sufficient connection between the taxpayer and the state to warrant the imposition of state tax authority;
  • South Dakota's law is constitutional under Complete Auto Transit

The issue addressed in Wayfair was the constitutionality of South Dakota's law that requires out-of-state retailers to collect use tax on sales made to South Dakota customers if the seller on an annual basis:

  1. Delivers more than $100,000 of taxable sales of property or services into the state; or
  2. Engages in 200 or more separate transactions for the delivery of goods and services into the state.

LOOKING FORWARD

This is a historic Supreme Court case with many implications.  It will take time to unravel all the effects and federal legislation may still be coming in this area.  

 

Resources: Checkpoint Marketing
 
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Jennifer Kolterman is a Certified Public Accountant (CPA) and Tax Manager at Hutchinson and Bloodgood LLP, in San Diego California.

Jennifer Kolterman lends her significant tax expertise in federal and multi-state taxation to the engagement team. She provides tax compliance and tax planning services to closely held businesses and their owners.  Her clients include manufacturers, distributors, professional service providers, real estate professionals and investors, as well as high net worth individuals. Jennifer also represents her clients in front of the IRS, State Board of Equalization, Franchise Tax Board, and various other tax agencies.

Jennifer Kolterman, CPA
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