To understand the implications set forth by the Wayfair case, it is important to study the history of “Nexus” pre & post-Wayfair.
In 1992, Quill Corp. V. North Dakota was a supreme court case that enforced the precedent of physical presence. This rule established the term “nexus” for tax purposes and allowed states to collect taxes from entities based on the physical location where the company was doing business. If your business was located in California, nexus was established in CA and therefore allowed the state to collect taxes from your business.
What is Nexus?
Nexus is the relationship between a state and an entity or a business. Establishing a nexus in a state means that the business is now a taxable entity in the said state.
On June 21, 2018, the South Dakota V. Wayfair supreme court case added another stipulation to the nexus ruling. The Wayfair case determined that nexus could be established through economic activity for an out-of-state seller. In addition to this, an employee working remotely is enough to trigger nexus in most states in a post-Wayfair world. South Dakota V. Wayfair has changed the tax landscape tremendously. ever since rather than a three-year period since it has been in action.)
. There was a significant impact across all industries, but more specifically internet reliant companies. This decision ultimately allowed individual states to collect taxes from businesses selling products in their states, whether it is through the internet or physically in their state.
This change meant that physical presence was no longer the only indicator to establish a nexus. An additional factor was created and is labeled as economic nexus. The 1992 Quill Corp. V. North Dakota supreme court case that enforced the precedent of physical presence establishing nexus was effectively superseded by the new standard of economic activity. The old rules for establishing a tax presence consisted of the physical location where your entity did business. This also gave you leverage on paying taxes. E.g., If you sold a product to a person in Georgia, but your business was located in New Hampshire, there was no tax paid on that transaction since New Hampshire has no transaction taxes. This was a very common strategy for those interested in saving a few bucks on their purchases. However, the new rules (South Dakota V. Wayfair) do not remove the physical presence precedent. This is still the first test in establishing a nexus for a business/entity.
Wayfair on Sales and Income Taxes
The Wayfair case had an immediate and massive impact on tax departments across the country as they felt the effects of the new ruling. An entity that conducted most of its business on the internet would now have to understand the myriad of rules and regulations in all states that they are selling to. In addition, a business affected by the ruling will have to collect and remit sales tax to each state they are doing business in. Out of the possible 45 states that collect sales tax, 43 have enacted some form of an economic nexus statute. The threshold for establishing an economic nexus varies by state. E.g, Alabama is $200,000 in economic activity whereas Colorado is 200 separate transactions or $100,000. These thresholds vary from state to state and are important factors to consider while choosing which states to do business in. These are merely a few examples of how economic nexus can be created on a state-by-state basis, and are hardly the only ways to do so. Therefore, it is very important to conduct research and understand the states where business is being conducted by your company and how each state handles its economic nexus statutes.
The monetary value of transactions or the number of transactions in a certain state is by no means the only way to create nexus by the new standard. Inventory located in a warehouse or the maintenance of said inventory is enough to create nexus, as well as a trade show exhibited by an employee, will also create nexus. As you can likely tell, this was a massive headache for tax departments and created a huge burden for smaller departments and those with older technology from a compliance standpoint. In the past, tax departments were relatively smaller components of a business’s finance department, after the Wayfair case you can be sure that the tax department is consulted on all changes to business structure and future endeavors.
Resale certificates are one of the most important pieces to the business of a large multistate wholesale enterprise. Goods that are purchased to then be resold are considered “sales for resale” and are deemed non-taxable – as long as you retain an accurate and valid resale certificate.
In one of the audits conducted on the business, it was brought to their attention that some of the resale certificates were expired and it was their highest priority to straighten out the situation as fast as possible. Failing to retain accurate retail certificates would create a massive tax burden for a business that intends to resell goods and has not been collecting taxes from customers on sales.
Factor presence is the standard for determining if a business is “doing business” from an income tax perspective. The basis of this determination comes from property, payroll, and sales over the set limit within each state. There are however other factors for determining if a state is doing business and these are known as single sales factor, unified combined reporting, and market-based sourcing. These sourcing methods are examples used to impact the sales factor apportionment for a particular state.
Future Applications of the Wayfair Ruling
states in the U.S. and across the globe. The specifics of how a digital advertising tax would be handled vary greatly from state to state whether it is gross sales from advertisements, billboards, promoted search ads (google), paid promotions on social media, or radio/television advertisements. The components of these bills have been highly scrutinized and debated, but you can be sure that some type of digital advertisement tax will be enacted in the near future shortly or soon as states try to tap into the internet to increase revenues.
With Covid-19 running rampant across the globe, states have been able to alleviate some economic burdens of the pandemic partly due to this ruling, but additionally, the “massive” spending by the Biden administration has eased some pressure. The Wayfair case was estimated to generate $13-$23 billion in sales tax revenue across the states each year. Just one year after the South Dakota V. Wayfair Supreme Court case was closed, due to this ruling, Texas was able to generate an extra $1.3 billion in sales tax revenue. The Wayfair case has effectively changed compliance practices and burdens for all companies dramatically in such a short amount of time and has opened the door for states to pursue more income through additional taxes on internet-related activities. This is merely the first step for states to monetize the internet in their favor, and rest assured, it will not be the last.
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