The Court overturned the 1992 Quill physical presence standard (aka Substantial Nexus), thereby allowing states to impose economic sales tax nexus standards on remote sellers. This ruling broke with 50 years' worth of legal rulings that barred the states from imposing sales taxes on most of the purchases their residents make from out-of-state retailers.
Although this may be a victory for the states, shoppes may have to pay sales tax when making online purchases. The states argument is that they have been losing billions of dollars for education, health care and infrastructure, and local merchants are being harmed by a competitively uneven playing field.
The Supreme Court decision concluded that previous legal rulings were made in error in light of the "internet revolution" which has changed the dynamics of the national economy. This new ruling is a correction; and the change has major implications for online retailers, including: Amazon, Etsy, Wayfair, Newegg, Overstock, etc. According to CBS News, Wayfair stock was down 2.5 percent in this morning's trading, while Etsy's was down more than 3 percent. Amazon shares dropped 1.3 percent, MarketWatch reported.
While larger companies certainly are now obligated to do so, the decision suggested that small retailers, who sell on eBay, for example, will not face the requirement. Facilitators may have to have a physical presence in the state, like a warehouse or fulfillment center, or they may simply have to do a certain amount of business in the state. Thresholds >$100K sales or 200K individual sales transactions (replacing the 2017 Marketplace Fairness Act (MFA)).
The rule is perspective only (not retroactive) and exemption based on activity thresholds, which intended to create a small-seller exception. It should be noted that this rule is NOT limited to physical products only, but can include some services (i.e., Internet, financial, media, etc.) which sell service across state borders.
Events Leading Up to This Change:
- Exponential growth of remote commerce (eCommerce, direct marketing, catalog etc.)
- Weak sales and use tax collection compared with the amount of economic activity
- An invitation from the U.S. Supreme Court to re-litigate these issues. Based on the 1992 Quill Nexus as being a temporary stop gap.
Tax *Nexus Laws Effective Date for Compliance - Updated 8/30/2018
Like all sales and use tax laws, the taxes imposed and exemptions imposed on marketplace sellers vary from state-to-state and many remain in litigation; however a few states began implementing in July 2018.
In the meantime, some states should be watched more closely than others. These are states with economic nexus, non-collecting seller use tax reporting, marketplace sales taxes, and cookie (software) nexus. States with affiliate and click-through nexus should also be monitored.
Recommended Actionable Steps
- When to register (wait)
- Step back, wait until your state defines their unique compliance requirements
- From a compliance and economic impact perspective:
—Where are products or services being delivered (destination state) destination based tax
—What is taxable (exemptions are state-by-state)
—Tax Filing Frequency (monthly, quarterly, annually based on volume)
—Exemption Certificate (may require expansion)
—Understand your current nexus footprint: (multi-state tax compliance)
- Develop a plan of action
- Where do you currently sell products and services? (list states)
- What are your current sales and transactions thresholds?
- What are your current items and services exempt from sales tax?
- Understand Voluntary Disclosure Agreements (VDA) and amnesties programs availability
- Understand ASC 450 holdback for previous noncompliance
- Automate your tax compliance. ERP track ZIP+4 line item invoicing, exemptions, tax rates, etc.
- Maintain state legislative regulatory tracking (inhouse or external service)
- Re-evaluate supply-chain management approach to sales tax collection
Pending Congressional Action est. the end of 2018
*Nexus Taxation Definition
Nexus, also called “sufficient physical presence,” is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. For example, if you sell goods or services in Los Angeles, you must file and pay California state taxes.