by Joshua Prywes
On June 21, 2018, the U.S. Supreme Court held that an online retailer does not have to maintain a physical presence in a state in order to be required to collect the state’s sales and use tax. The decision in South Dakota v. Wayfair, Inc. will significantly expand the ways that states can tax online and remote retailers.
Before this decision, states were largely limited in imposing sales tax on retailers and could do so only if those retailers had a physical presence in the state, either through property, employees, or referral sources in the state. The South Dakota law that the Court reviewed provided that a remote seller must collect tax if the seller had either $100,000 in annual sales to customers in the state or at least 200 sale transactions there. Many other states have either passed laws or enacted rules which mirror these thresholds. The Court decided that remote sellers do not need to have a physical presence in the state before they can be required to collect sales tax. Instead, states may impose sales-tax obligations on companies that have an economic nexus with the state. The ruling will affect companies selling merchandise over the internet, businesses selling digital products, and certain digital, data, and cloud computing services.
States are still subject to certain limits on whom they can impose sales-tax obligations. The Court held that the South Dakota law included several features designed to prevent discrimination against interstate commerce, including a safe harbor for limited business in the state, no retroactive taxation, a standardized compliance system, and access to state-provided software with audit immunity for those who rely on the software.
The Texas Comptroller of Public Accounts announced his intent to revise the Texas sales tax in light of the Wayfair decision. The draft rule amends the current definition of “engaged in business” to delete any “physical presence” and instead requires a business to collect sales tax when the business has engaged in systemic solicitation of sales through various types of communication systems or solicited orders by mail or other media. The Comptroller also proposed a safe harbor that excludes remote sellers with annual Texas-sourced revenue of under $500,000 from the sales-tax obligations. The Texas rule’s proposed effective date is January 1, 2019, and compliance will be postponed until October 1, 2019 to provide time for affected remote sellers to prepare for new collection and reporting obligations.
Companies with sales tax exposures based on a physical presence in a state should consider requesting a voluntary disclosure agreement with the respective state-tax agency to limit the years for which they are subject to potential additional tax and penalties. Without a voluntary disclosure agreement, the state would not be limited in how many years it could look back. Generally, under voluntary disclosure agreements, the state waives penalties and only charges tax and interest.
Companies should also consider entering into voluntary disclosure agreements for income-tax obligations. Certain states assess income-tax obligations if a company has sales exceeding a certain threshold. Remote sellers that have not filed income tax returns may have filing obligations that states may seek to impose retroactively.
As states react to the Wayfair decision, businesses that sell products or services online should prepare to begin collecting sales tax in many new jurisdictions.
Joshua Prywes is an associate at Greenberg Traurig LLP. He can be reached at email@example.com.