Five years ago marks the introduction of the case of South Dakota v. Wayfair, Inc., a ruling made by the Supreme Court of the United States, replacing a previous Supreme Court case from 1992, Quill Corp. v. North Dakota. The decision, made on June 21st, 2018, brought significant changes to the landscape of state and local taxation. It allowed states to collect sales tax from out-of-state sellers without requiring a physical presence within the state. This change ended up revolutionizing the way e-commerce transactions are taxed.
The Wayfair ruling
The Wayfair ruling has led to changes in the way that businesses comply with state and local sales tax laws. In the past, businesses could avoid the requirement of collecting sales tax from out-of-state customers by simply not having a physical presence in those states, as established by Quill. However, the Wayfair ruling disregarded the physical presence requirement and introduced the “economic nexus.”
Economic nexus requires a business to have sufficient economic presence in a state, mandating the collection of sales tax. It allowed states to require remote sellers to collect and remit sales taxes if they meet certain economic thresholds, which can vary from state to state, regardless of whether they have a physical presence in the state. The economic nexus standard usually depends on a seller’s sales revenue or transactions within a state in a year.
Adapting to SALT changes
Previously exempt businesses may now need to collect sales tax and comply with certain tax requirements. It is important for these companies to address SALT changes by following these steps:
- Nexus study: Evaluate the company’s activities (involves sales revenue, number of transactions, and physical presence) and review the state’s ruling to determine the states in which nexus has been established.
- Sales tax registration: The company should register for a sales tax permit with the appropriate state tax authority once nexus is established. This enables them to legally collect and remit sales tax in that jurisdiction.
- Sales tax collection: Implement systems and processes to accurately calculate and collect sales tax from customers in the states where nexus is established.
- Compliance maintenance: Regularly file sales tax returns. Review and update sales tax registrations for each state where the company is doing business. Stay informed about changes in tax rates, exemptions, thresholds, and filing requirements.
- State tax laws monitoring: The laws are constantly changing at both the state and local levels. Sales tax laws and regulations can evolve over time. Staying informed about potential changes can help the company adapt and maintain compliance.
Companies that fail to comply with sales tax nexus and collection requirements may be subject to penalties and interest. Consult with Leyton’s state and local tax consultants to ensure that your company follows all applicable sales tax laws.
