In last summer’s landmark decision of South Dakota v. Wayfair, Inc. (“Wayfair“), the US Supreme Court upheld South Dakota’s economic nexus law, which requires companies to collect sales tax when their sales or number of transactions with that state exceed certain thresholds.
Since the Wayfair decision, over 30 states have adopted sales tax economic nexus rules in some form, all with varying effective dates. With legislative sessions beginning in January 2019, we expect more states to adopt economic nexus provisions. Here are some key takeaways that could affect your business:
Wayfair Applies to All Businesses
While initially tagged as an “e-commerce issue,” Wayfair’s economic nexus standard does not differentiate between e-commerce and non-eCommerce businesses. Rather, all businesses that meet the requirements of a “remote seller” (or similar term) are subject to economic nexus laws. For example, Georgia defines a “remote seller” as any person who sells tangible personal property from outside of Georgia that is delivered electronically or physically to a location within Georgia. Thus, if a “remote seller” meets Georgia’s threshold sales or transactions, it has economic nexus and must begin collecting sales tax.
Software / SaaS Companies Are Hit Hard
Many small to mid-market sized software providers do not have a physical presence outside their home state. However, most software providers sell to customers across the US. Prior to Wayfair, this fact allowed software providers generally to be exempt from sales tax due to having limited physical presence nexus. However, Wayfair now exposes virtually all software providers to sales tax in multiple states. Additionally, a majority of states now subject software sales (including SaaS-Software As A Service–and electronically-delivered software) to sales tax.
Manufacturers, Wholesalers, Distributors, and Resellers Are Impacted Too
Sales tax is only imposed on sales (of taxable goods) to end users; however, all sales are presumed to be to an end user unless the seller obtains a valid “exemption certificate” from the purchaser.
Thus, if a business meets the economic nexus threshold for a state but does not collect valid exemption certificates from purchasers within that state, the business is deemed to have sales tax nexus and all sales to those purchasers are taxable. Many businesses overlook this compliance step and create tax exposure where none should exist. This issue is further complicated for drop-sellers in the ten states that require the purchaser to be registered in the ship-to state.
Thus, even sellers to other-than end users must analyze economic nexus rules to ensure compliance.
How Bennett Thrasher Can Help
Bennett Thrasher’s state and local tax team is uniquely positioned to help your business:
- Determine when and where you are required to collect and remit sales taxes under the new economic nexus rules;
- Determine whether your products and/or services are subject to sales tax in those states; and
- Find a sales tax compliance solution (including management of exemption certificates) that fits your business’s needs.
In addition, we can identify and resolve any prior period sales tax exposure issues, prepare your business for a future sale and assist with many other state and local sales or income tax matters.