By Teresa Silva, CPA, CCE
Now, more than ever, it is imperative to understand your company’s exposure to sales tax issues as it
relates to out of state sales. A new Supreme Court Ruling in the South Dakota v. Wayfair, Inc., 138 s. Ct.
2080 (2018), is a game changer in the traditional brick and mortar definitions of nexus.
Nexus? Wayfair? What?! Great questions! These are mouthfuls for the most casual observer to the sales
tax laws and now, with over 10,000 sales tax jurisdictions in the US, it is more important than ever that
you understand and recognize your exposure.
Nexus, by definition, is a connection or a link that establishes a taxing jurisdiction’s ability to require
you, as a vendor, to collect and remit sales tax to that jurisdiction. Traditionally, nexus relied on a
company to be physically present in a taxing jurisdiction to require registration for sales tax collection.
This could be in the form of a brick and mortar building or having a sales force (i.e. employees) within
the boundaries of that jurisdiction.
Where does Wayfair come in and how does it change nexus? Well, as you guessed, the internet has
changed the face of the way business operates. Many businesses can sell across state lines through their
own websites, without ever having a physical presence or establishing any connection within the taxing
jurisdiction. This has caused quite a revenue issue for many taxing authorities. Businesses are no longer
collecting sales tax and consumers aren’t remitting the use tax.
Some states have decided that there is a revenue minimum or sales transaction count that automatically
assumes a business meets nexus in that state. South Dakota was one such state writing into their laws
that a seller that makes $100,000 or more in sales or 200 sales transactions within the state must
register and collect sales tax within that state. While the law did not impose the tax retroactively, South
Dakota did pursue four companies that they knew were in violation, one of which was Wayfair, Inc. The
legal battle over the sales tax jurisdiction issue was fought at the state level and lost, but when it was
taken to the Supreme Court, the Supreme Court ruled in favor of South Dakota.
What does this mean for you? Well, for now, it is unclear exactly where the dividing line is as to how
much the taxing jurisdictions can push for nexus, but the Supreme court believed $100,000 in revenue
or 200 sales transactions was a reasonable amount. However, not every taxing jurisdiction has the same
nexus definition; some states are as high as $500,000. Washington state agrees with the Supreme Court
at $100,000 or 200 transactions.
A couple of other things to consider besides nexus when looking at your sales tax liability issues, what
items are taxable? What services are taxable? Not every taxing jurisdiction taxes everything the same.
“For example, many states tax sales of clothing while a few exempt them (e.g., Pennsylvania, which does
tax formal clothing and sportswear), and some apply a cost threshold (e.g., New York taxes articles of
clothing that cost $110 or more).” (Brennan Jr. Esq., David L. “Sales tax compliance post-Wayfair.”
Journal of Accountancy Aug 2019: pg 19).
Before you start registering in every state you do business it is important to contact you accountant or
CPA to better understand how this will affect you and to make a game plan to ensure that you are
covered for your tax liability going forward.