January 21, 2019

‘Wayfair’ Update: States Adopting Sales Tax Changes (article)

Sales and Local Tax

For almost three decades, sales taxes from interstate commerce were controlled by one U.S. Supreme Court ruling: Quill v. North Dakota. In this case, the Court concluded that an out-of-state seller must have physical presence in a state before sales tax collection laws could be imposed. However, on June 21, 2018, the U.S. Supreme Court overturned this precedent when it ruled in South Dakota v. Wayfair that physical presence was no longer the only requirement. In this 5-4 vote, the Court reversed one of the most influential interstate commerce laws of our generation.

Since Wayfair, states have been busy. Now that physical presence is not the only requirement, states are looking for ways to impose their sales tax laws onto out-of-state companies. Many are tweaking their existing laws to establish “economic presence” thresholds in an effort to appropriately define when an out-of-state company is subject to their state’s sales tax collection responsibilities. Others are simply adopting rules through the issuance of administrative guidance. In either case, companies everywhere are facing a multitude of new and burdensome filing requirements. 

It is also important to note that Wayfair extends to all companies, not just online retailers. Accordingly, service companies that provide software as a service (SaaS), information services, data processing services, repairs and maintenance on tangible personal property, to name a few, are also implicated by the new Wayfair rules and should review their sales in each state to determine whether sales tax collection is now required.

Trends in Sales Tax Changes

Following the Supreme Court ruling, several states including Colorado, Hawaii, and Illinois, adopted sales tax changes that are substantially similar to South Dakota’s: out-of-state sellers that make sales of tangible personal property to in-state customers that exceed $100,000 in sales revenue or 200 separate sales.

Other states have taken a slightly different approach. Alabama numbers among the states that implemented a higher threshold than South Dakota’s: retailers and marketplace facilitators must collect and remit sales tax when they have qualifying sales in excess of $250,000 with in-state customers. Georgia’s sales thresholds are also $250,000, or 200 or more retail sales with Georgia residents. A few states have adopted a use tax notification requirement if sales are below the stated threshold for collection. For instance, in Washington, if an out-of-state company makes sales into the state of at least $100,000 or 200 transactions in the current or prior year, the company must collect and remit sales tax to Washington. However, if the remote company has less than $100,000 or 200 transactions for purposes of collection but its sales exceed $10,000, the company has a choice of either registering and collecting the sales tax, or following certain use tax notice and reporting requirements. Pennsylvania also has a $10,000 registration or collection threshold that went into effect on April 1, 2018.

Prior to the Wayfair decision, Massachusetts had a law on its books that would require businesses that collect internet cookies from Massachusetts’ customers to collect and remit sales tax if the companies make more than $500,000 in internet sales and 100 or more transaction into Massachusetts. Massachusetts has indicated that it intends to apply its law retroactively to Oct. 1, 2017.

It’s also important to note that the vast majority of states’ thresholds reference “gross sales,” meaning that even transactions that are not typically subject to sales tax (i.e., sales for resale, or exempt transactions) will count toward the economic presence threshold. Accordingly, a company that sells goods wholesale and also sells direct to consumer online may find its direct consumer sales, even where the direct to consumer sales do not exceed the established threshold amounts, are subject to a state’s sales tax requirements.

Timing Trends

Even the states that implemented the thresholds in South Dakota’s law to the letter have different effective dates for their changes. Hawaii’s changes were effective immediately—July 1, 2018, while Illinois’s changes took effect Oct. 1, 2018 and Colorado’s on Dec. 1, 2018.

Although nearly half of the states had changes effective in 2018, a few have changes effective for the first time in 2019. Six states, including Utah, had sales tax changes that took effect on Jan. 1, 2019. California has changes effective April 1, 2019. Pennsylvania’s $100,000 mandatory collection requirement comes into effect July 1, 2019. Some states have yet to make changes to their sales tax processes, including Florida, Kansas, and Missouri, among others. Here is a timeline that represents when each state's Wayfair economic nexus thresholds are in effect.

Possibility of Uniform Guidance

At present, there doesn’t appear to be much traction at a federal level around uniform sales tax rules. There is a private initiative—the Streamlined Sales and Use Tax Agreement (SSUTA)—that is a voluntary agreement that some states have chosen to follow in hopes of simplifying the existing state-specific sales tax system. However, the SSUTA has been around for several years with no real growth or movement in the idea of a federal uniform sales tax law. Also, while there are some simplification bills that have been introduced at the federal level, Congress has been reluctant to pass legislation that impedes on the states’ ability to collect sales tax.

What’s Coming Next

We anticipate additional state activity around the sales tax issue in 2019, particularly among the states that adopted a wait-and-see-approach after the Wayfair ruling. Companies will also need to work through the ramifications of the sales tax law changes, including how to tackle the state registration process, how to ensure collections are both collected and remitted, and which transactions may be eligible for a sales tax exemption.

A tax advisor experienced with the multistate complexities that came out of the Wayfair decision can help ensure new and existing compliance requirements are met. 

Related Reading

Online Retailers Reeling as Supreme Court Overturns Quill in Landmark Sales Tax Ruling

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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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