In 2018, the Supreme Court made a pivotal decision in South Dakota v. Wayfair. The ruling eliminated the precedent that a taxpayer has to have a physical presence in a state in order to be subject to the state’s sales and use tax laws. It allowed states to require out-of-state taxpayers to charge sales tax to consumers, even if the taxpayer doesn’t have a physical presence in the state.
The ruling gave states the green light to revise their sales tax nexus requirements because of the rise of e-commerce. As a result, states can require out-of-state taxpayers to comply with their laws and collect sales tax.
South Dakota won its case. Now, vendors that don’t have a physical presence in the state but have either 200 transactions in a year or in-state sales of $100,000 or more have to collect and remit sales tax to the state of South Dakota.
But how would other states interpret this ruling? What changes would they make to their sales tax policies?It’s no surprise that each state has its own approach:
Kansas updated its sales tax policy. Unlike South Dakota, Kansas didn’t set any minimum transactions or sales revenue. The policy requires online and remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on all sales delivered in Kansas.
Remote sellers also must register with Kansas’ Department of Revenue to obtain a sales and/or use tax number. Every retailer must collect and pay sales tax as of Oct. 1, 2019.
In December 2019, Michigan Gov. Gretchen Whitmer signed legislation that requires online platforms such as Amazon and eBay to collect sales tax. The law fixed a loophole that allowed organizations to ignore collecting tax on transactions by sellers who use a third party’s platform.
According to a MiBiz article, “The new law should generate an estimated $60 million in sales tax revenue for the state in the present fiscal year and $96 million in the 2021 fiscal year.”
Before fixing this loophole, Michigan adopted legislation identical to South Dakota’s – sellers whose gross receipts from sales are more than $100,000 in the previous calendar year or who have more than 200 transactions in a year have to collect and remit sales tax.
The state of Pennsylvania is taking a different approach in the wake of the Wayfair ruling. Pennsylvania is extending the analysis of sales tax to corporate income tax. Businesses that exceed $500,000 in gross receipts are required to file a corporate income tax return as of January 2020 – regardless of their physical presence.
Due to Wayfair, Texas now requires remote sellers who have revenues greater than $500,000 in the preceding 12 calendar months to collect sales tax. If you’re a remote seller that falls under the $500,000 threshold, you’re exempt from the policy.
According to Texas law, remote sellers are those that engage in regular or systematic sales of taxable items in Texas or solicits orders for taxable items by mail or other media. This law has been in effect since Oct. 1, 2019. The first 12-month period for sellers to calculate their Texas revenues is July 1, 2018, through June 30, 2019.
Plus, if you’re a foreign taxable entity with no physical presence in Texas, you have nexus for Texas’ Franchise Tax if your gross receipts are greater than $500,000.
Why does all of this matter?
If you do business across the U.S., you need to know the various thresholds states are implementing to collect sales tax. If you’re a distributor, retailer, manufacturer, etc. are you aware of how these laws impact your company? Your tax liability? Are you complying with relatively new tax policies? The laws outlined above reveal that states are still working on how to interpret and move forward with the South Dakota v. Wayfair decision. Do they play it safe and stick with South Dakota’s model? Or do they follow Pennsylvania’s lead and set an economic threshold for corporate income tax?
We’ll continue to see states implement new tax laws that outline how and when they collect sales tax from vendors. As a consumer and vendor, you should pay attention to states’ tax policies or rely on your state and local tax experts to notify you when a state policy affects you.
Have questions about a state’s sales tax nexus after the Wayfair case? Let’s talk!