For sales tax professionals like us, Wayfair is the gift that keeps on giving the whole year through.
Sales tax nerds just call it Wayfair, "Hey, Wayfair, Wayfair." But Wayfair is actually short for a Supreme Court case called Wayfair v. South Dakota. The anniversary of the date of the decision is June 21st, 2018. It was a landmark decision which really turned our industry upside down.
Before Wayfair, you could sell anything online. For instance, before Wayfair, you could buy things online and e-commerce retailers wouldn't charge you sales tax. But going even farther back – all the way to 1967 - we can look at National Bellas Hess v. Illinois which was the first case that actually set the standard for sales tax as it related to physical presence. That ruling said that a mail order reseller was only required to collect sales tax if it had “physical presence” – some physical contact with the state.
And then about 10 years later, the Supreme Court heard a case which was Complete Auto Transit v. Brady. That one was a Michigan corporation doing business in Mississippi. It established the four prongs for sales tax or what we consider the four-prong tests.
1. The need to have substantial nexus.
2. Non-discrimination (interstate and intrastate taxes cannot favor one over the other)
3. Fair apportionment (tax only the activity that transpires in the taxing jurisdiction)
4. Fair relation to services. A company has to be able to have police services, fire services and things of that nature.
So that was all kind of a big thing with Complete Auto Transit back in 1977, and established a little bit further definition of what physical presence would actually entail in that four-prong test.
Fast-forward all the way to 1992 and Quill v. the State of North Dakota. All Quill really did was truly re-cement the National Bellas Hess decision and look at the requirements for collection of tax, but more from a use tax lens. Because North Dakota was trying to enforce with the Quill company that they had to collect a kind of retailer's use tax from their customers using products within the state. Quill’s argument was that they didn’t have physical presence, therefore, they didn’t have a requirement, and the Supreme Court kind of agreed with them.
Which brings us back to the Wayfair decision and what occurred with the current Supreme Court ruling. The Court had to take a step back and kind of analyze the economic marketplace. By this time, the world had changed since these previous cases were decided, and it changed quickly, as we all know, the internet was invented and companies like Amazon exploded quickly because ordering stuff online is cool and very convenient.
For years prior to Wayfair, sales tax professionals were talking about how crazy it was that Amazon was a billion-dollar business and didn’t collect sales tax. States naturally wanted their share. And further, the states saw that even without a physical store representative in the state, the sellers were still driving their trucks into the state to deliver products, still using the state and local fire and police protection, etc.
The Supreme Court hadn't really taken up listening to a case or wanting to grant a tertiary to a particular case to opine on this because they were waiting for Congress. If you read Justice Kennedy's opinion, the majority opinion on the ruling in Wayfair is really interesting because he called out Congress in the opinion.
It’s worth reading the opinion; you can hear the tonality from Justice Kennedy when he talks about Congress's inability to create bipartisan legislation to address this issue. The Supreme Court came out for one of the very few times in their history and admitted that they were wrong. They said they should never have opined on Quill and remanded their position back to the Complete Auto Transit case, focusing on substantive economic presence. Then they said it was not their position to define what substantial economic presence is and what that threshold may be. They left it up to the states.
From there, South Dakota came up with the first thresholds: $100,000 in economic nexus and 200 transactions, which was really important. Now you have companies instead of being required where they have a physical presence, like in Georgia or Florida, if they're meeting these economic nexus thresholds everywhere throughout the United States, they have to now collect tax and they have to remit it.
Even today, there are still changes. Thresholds are being increased; some states are getting rid of the transaction-based threshold. Which is a good thing. We always use the example of Poor Grandma. Poor Grandma makes little potholders and sells them on Etsy for five to $7. She sells 200 of them in the state of Colorado, she now has to register for sales tax. She may only have $1000 in taxable sales. So, some of these states are reviewing these thresholds and making adjustments kind of as we're moving forward.
Just because you have an economic nexus somewhere doesn't mean that your products are taxable or if you're doing wholesale sales like in Illinois. If you do $1 million in wholesale sales inside of Illinois, do you have to register for sales tax? Possibly not. The states come back to us, and certain states have said, "If 100% of your transactions are exempt, we don't want you registering here. We don't want to deal with the paperwork just as much as you don't." So, it's still really important to meet with people like the Synexus team and your other accounting advisors in the sales and use tax space to actually give you some guidance on this.
Even if you make millions of dollars in sales and none of them are taxable, you still need to report them because then there's also a retailer selling your wholesale products that also report tax that they need a matchup against as far as audits go, even just making sure you have dotted all the Is and crossed the ts, whether you have nexus or not, with reporting.
Wayfair Oddities
There have been some interesting byproducts of Wayfair. One of those is one of our favorites, Colorado and their retail delivery fee.
Beyond sales tax, Colorado started a sales tax of $.27 per taxable transaction for delivering goods in the state. It applies to any kind of motorized vehicle. We covered that in a blog post here.
Illinois passed Leveling the Playing Field for Illinois Retail Act which was supposed to bring everyone into truly an equal standing with regards to Illinois’ sourcing rules. And Illinois, for the non-tax geeks that are out there, has interesting sourcing laws with regards to origin-based sourcing. Sourcing is how you identify the tax rate for a particular transaction. Illinois uses modified origin-based sourcing where you would typically use where the origin of the shipped item is. Or if you’re looking at where an order's being administered so if you have an office in Cook County and you take the order in Cook County, which is City of Chicago or the outlying areas, and you ship it from Rosemont, Illinois and you move it to Springfield, Illinois, you're actually going to use the Cook County sales tax rate where the order was actually administered from. Confused yet?
What this Level the Playing Field law says is anyone who has a physical presence inside of the state of Illinois and ships goods from outside of the state of Illinois into Illinois gets to use destination-based sourcing and they only have to collect at the state rate. So, think about that. Say Jenny has her office and all of her team inside of the City of Chicago, and she has a warehouse that's in St. Louis, Missouri, and she ships all of her goods into Illinois from St. Louis, Missouri. She only has to collect at 6.25%. But if I do not have an office or any physical presence in Illinois, and my warehouse is outside of Illinois and I ship into Illinois, I have to use destination-based sourcing and I have to collect all the local taxes. So, if I ship into the City of Chicago, I have to collect upwards of 13%.
There’s a lot of conversation about this potentially violating one of the four prongs we mentioned earlier, specifically the discriminatory tax. Some are challenging this through tax tribunals and other avenues, but it will be interesting to see how this shakes out over the next weeks.
Third Prong, Illustrated by Jenny
Third prong is the transaction count. If you stick with the Poor Grandma example, she’s doing her needle point and selling, and I buy these things off Etsy. I have bought many of a sassy needlepoint cross-stitch saying that I have framed for friends like “that's what she said” or maybe keyboard cats, I don't know, but I buy these things.
So, if my favorite seller sells 200 of those directly to me, she has to register. Maybe if she sold them to me in the state of Georgia and she's in Florida shipping those to me, she had to register with the state of Georgia and charge sales tax.
Back to Nexus: What You Need to Do
If you haven't conducted a thorough nexus study of your sales and what your business is doing, you need to contact someone. There is something that's called unlimited lookback. Now, we don’t typically see a lot of states enforce unlimited lookback, but if they know that you willfully have been avoiding registering for sales tax in those states, they could argue fraud. They could say that you've been fraudulent in your approach to your business activities within those states, and they can enforce the taxing greater than their statute of limitations. Most states, statute of limitations for legal perspective is three years. But some of these states can come upwards four or five years for assessments back to the original enacting date of their Wayfair laws. A lot of states didn't really get into gear until 2020, usually end of 2019, beginning of 2020 is when a lot of states started passing legislation.
We recommend that you look at the last few years of your sales and just make sure you are in compliance with these states because they will find you. Synexus can help. If you want to talk to us about whether you are (or aren’t) in compliance, shoot us an email at synexuspod@synexustax.com.
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Disclaimer: This post is a loose summary of the transcript from the Taxing Poetic podcast, Episode 1. Gaps, nonsensical meandering and occasional inaccuracies are possible. Please reach out to our team for questions and to discuss your sales and use tax situation before taking any action.
