In June 2018, the United States Supreme Court decided the landmark case South Dakota v. Wayfair, Inc. – and in so doing, may have radically altered the sales and use tax regulatory landscape for online retailers nationwide. As a result of the Court’s narrow 5-4 decision, in which the majority opinion was authored by the recently retired Justice Anthony Kennedy, online sellers are now required to collect and remit sales tax regardless of whether the seller has a “physical presence” in the state where the transaction occurred. Unsurprisingly, the Court’s decision adds a new layer of complexity to sales and use tax compliance, underlining the necessity of working with an experienced California sales tax attorney.
As regular visitors to our tax law blog may recall, we discussed the Wayfair development in a previous article. If you don’t have time to read the full article, allow us to provide a quick summary.
In June, the Supreme Court overhauled decades of precedent established by cases like Quill Corporation v. North Dakota (1992) and, even earlier, National Bellas Hess, Inc. v. Department of Revenue of Ill. (1967), creating stricter sales tax rules for remote sellers. Thanks to Quill and its predecessor, online retailers (or, at the time of Bellas, mail order companies) enjoyed freedom from the burdensome requirement to collect and remit sales tax – a requirement historically applicable to brick-and-mortar merchants – unless they maintained a “physical presence,” such as a warehouse or corporate office, in the relevant state. (Note that five U.S. states – Oregon, Delaware, Montana, New Hampshire, and Alaska – currently do not impose sales tax at all, regardless of whether a merchant operates a brick-and-mortar storefront or is exclusively engaged in e-commerce.)
That longstanding system changed almost overnight with the Wayfair opinion (available here), in which the Court reasoned, “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U. S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, are overruled.” Rather than relying solely on physical presence to establish a “nexus,” or connection, with a given state, the creation of a nexus will now be “based on both the economic and virtual contacts [that online sellers] have with the State” (italics our emphasis).
On the heels of the ruling, online sellers around the country are scrambling to assess their compliance with the new rules – especially in states where enforcement is going (or has gone) into effect sooner rather than later, such as Vermont and Hawaii (July 1, 2018), Illinois and Alabama (October 1, 2018), Connecticut (December 1, 2018), and Iowa and Georgia (January 1, 2019). To add to the confusion, not only does each state have its own sales threshold – for instance, when sales tax enforcement begins in Georgia on January 1, the reporting threshold will be $250,000, based on gross revenue – but furthermore, the economic nexus laws which set these thresholds are in a state of flux due to the Wayfair ruling. Moreover, some states have adopted “cookie” nexus laws, where the nexus is established by browser “cookies,” or messages that allow web servers and web browsers to communicate information about individual users.
If a remote seller surpasses the sales threshold in the applicable state – for instance, if an online merchant earns gross revenue exceeding $250,000 in Georgia next year – the seller will be required to register with that state. It is critical that the seller completes the appropriate registration process before collecting and remitting sales tax in a given state. Unsurprisingly, every state follows a different application procedure, underlining the importance of working with a California tax lawyer who is highly familiar with California sales tax laws.
As the legal and financial impacts of the Wayfair decision continue to take sharper form, there is currently no telling where the dust where ultimately settle. If you sell products or services online in the state of California, you should review your compliance with an experienced tax attorney. Keep in mind that failure to comply with California’s sales tax laws may result in your business being audited by the Franchise Tax Board (FTB), the California Department of Tax and Fee Administration (CDTFA), or the Internal Revenue Service (IRS). For a reduced-rate consultation concerning a sales and use tax question, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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