The Wayfair Case
In 1992, the Supreme Court, in a case referred to as “Quill,” ruled that the lack of substantial physical presence in a state is sufficient grounds to exempt a business from having to collect and remit sales or sellers use taxes to a state.
This precedent protected small business from “burdensome” administrative processes that would have interfered with and limited interstate commerce.
The “Quill” case ruling laid down the law that ruled our land until last June 21st 2018.
On that day, the current Supreme Court reversed the “Quill” decision in a new case referred to as Wayfair.
Economic nexus, as established in the Wayfair case, was defined as $100,000 or 200 transactions per year shipped to South Dakota residents or companies as the threshold for requiring an out of state company to be subject to sales and use tax collection.
In the 2018 Wayfair decision, the Supreme Court said states could require companies with an “economic nexus” to their state to collect sales and use taxes.
The potential to encumber small businesses who sell outside of their home state by forcing them to track and comply with a different set of sales tax laws for each state is a very real burden.
Non-compliance can result in penalties and back taxes.
Without an automated solution, managing compliance could be a full-time job due to the complexities of state tax regulations. These may include:
- Navigating 10,000 plus sales jurisdictions across the country, many of which are amorphous and do not conform to city or county boundaries
- Using different tax bases (taxable product categories, i.e., clothing, food items, etc.) in each state (except for the SST member states, within the state’s localities, SST members agree to standard taxability within their state)
- Figuring out all the arcane rules related to taxability of handling, shipping and certain product usage rules that also vary from state to state
- Learning to use each state’s portal to report and pay sales and use taxes, even as these are being changed to keep up with reporting changes
- Monitoring sales tax changes across the same 10,000 plus jurisdictions
- Managing their own sales dollars and transaction counts by state
- Tracking the different thresholds of each state on how soon they must begin collecting sales and use tax after hitting that state’s threshold amount (Believe it or not at least one state expects tax on the first transaction after the threshold is reached)
Resellers & Exemption Certificates
I’ll share a story that I recently heard from a former state sales tax auditor.
He found that many distributors do not do a good job of administering the resale exemption certificates issued by the state that the reseller’s customers reside in.
And if that certificate was not properly filled out and signed, he would then disallow the exemption and all that revenue would be declared taxable.
In addition, penalties and interest would be added on top of the uncollected tax.
Since every state has its own forms for resale certificates and its own rules for renewal of certificates (or not), administration is not a small task. And unfortunately, a task that is sometimes not given the importance it deserves until an audit is coming.
You Have Options
It would be much better to prepare before the states start their hunt for revenue so you can formulate a plan, rather than wait.
We suggest first and foremost, if you get a letter from another state asking you to provide information to them, call your lawyer and your sales-tax-specialist accountant immediately, and before you provide any information discuss your situation and your options.
In addition to planning to handle these new requirements, we encourage small business owners to build your infrastructure and prepare your data so that you can handle this.