Virginia Taxation

After South Dakota v. Wayfair

The Supreme Court ruled on a landmark sales tax case. Now what?

Terry Barrett, CPA As reported in the March/April issue of Disclosures, the U.S. Supreme Court agreed to hear a case that had the potential to substantially change the way states and localities impose sales and use tax. The Court heard the oral arguments on April 17 — coincidentally or not, Tax Day — and issued its opinion on June 21. At issue was whether states may impose sales tax collection requirements on out-of-state businesses that have no physical presence in the state but conduct sales to in-state customers.

In a 5–4 decision in South Dakota v. Wayfair, Inc., the Court overturned its prior rulings in the Quill (1992) and National Bellas Hess (1967) cases and said that physical presence is not required to impose sales/use tax collection requirements on out-of-state (remote) businesses selling in the state. The Court found the physical presence standard “unsound and incorrect.” The Court’s decision will have far-ranging tax implications and accounting impacts on businesses; however, it is too soon to know exactly what they are. What we do know, though, is that businesses selling taxable goods and services may have tax collection requirements in states where they may not have in the past. Currently, approximately 22 states have laws that requires out-of-state sellers with sales above a certain threshold, typically $100,000 during the previous 12 months or calendar year, or separate sales transactions above a certain threshold (typically 200) to collect tax on sales to in-state customers. Some states have asserted those requirements are effective immediately (if their laws were already effective); others have effective dates in the near future.

States without the economic nexus statutes or other statutes that can be construed as allowing the taxation of remote sales are slowly announcing their plans to address the issue. Most have said they are carefully considering their current laws and determining next steps. In the Wayfair case, specifically at issue was South Dakota’s law that required out-of-state sellers with sales exceeding $100,000 or 200 separate

transactions in the state in the previous year to collect the tax. Most of the states that currently have economic nexus laws have similar thresholds, and while small businesses are hoping the reporting thresholds will be similar (or higher) in other states, this is an area of uncertainty. Some states could assert that a single sale or de minimis amount of sales could create reporting requirements.

There is concern regarding the potential retroactivity of the Court’s ruling. While the specific issue under consideration in the Wayfair case was South Dakota’s law, which did not provide for retroactive application, there is concern that states could assert that sellers are responsible for taxes on sales in prior periods.

The new tax collection requirements will impact most businesses but in various ways. Obviously, if a business is selling tangible goods at retail in several states, that business will likely have additional tax registration, collection and reporting requirements. The question is: will there be thresholds, or will tax have to be collected on the first dollar of sales? Time will tell, but businesses selling at retail should starting thinking about and preparing for potential tax collection requirements. While most states tax tangible goods, the rules may vary depending upon the particular item sold, and any ancillary charges, such as any services that may be provided, shipping, delivery, late fees, etc. It is noteworthy that some businesses may have previously had physical presence in the state, such as through employees meeting with customers, sales people soliciting sales, independent contractors selling or performing repair services, etc. Some states have announced that while their economic nexus laws may have prospective application, businesses with prior tax filing requirements are not entitled to the prospective filings. Thus, amnesty programs and voluntary disclosure programs should be considered by such businesses for potential prior-period tax requirements.

Businesses providing and/or selling services will also be affected. While Virginia does not tax many services provided on a standalone basis, such services may be taxable in other states. Popular services that are taxed include computer consulting, data processing, information services (e.g., subscription services) and lawn care, to name a few. In addition, many states tax computer software delivered electronically, Software as a Service (SaaS) and digital products (ebooks, apps, music, etc.).

Accordingly, a Virginia-based business previously without sales tax collection responsibilities may be surprised at its potential new sales responsibilities. Businesses should carefully consider what they are selling and the services they are providing and where their customers are. Most of the current thresholds are either $100,000 in sales or 200 separate transactions. This means that a single sale in excess of $100,000 could subject a business to tax collection and reporting requirement in a state. Most states require the filing of returns even if no tax is due, so there will be additional and on-going administrative requirements.

And businesses on the purchasing end will also be impacted. Some sellers, in their effort to comply with all the various requirements, may not invest the time and effort into ensuring they are collecting the proper taxes. This may result in the overcollection/overpayment of taxes. Invoices, particularly for large purchases, should be reviewed to ensure the proper tax is being billed and paid.

There are concerns, too, regarding potential income/franchise tax implications of the Wayfair decision. Historically, the Court has refused to hear challenges to state income/franchise tax economic nexus laws, which has suggested the Court agreed with the concept. However, now with its confirmation that economic nexus is appropriate for sales tax requirements, the Court may have further signaled its acceptance of economic nexus for income/franchise purposes. This may encourage states to consider adopting such laws. More economic nexus income laws coupled with states’ reactions to the federal Tax Cuts and Jobs Act could substantially complicate state income/franchise tax requirements.

The dissenting opinion of the Court in Wayfair, while not rejecting the fact that the Quill decision was incorrect, was focused more on a different approach to remedying the remote seller tax collection (or lack thereof) situation. The opinion suggested that Congress, rather than the Court, should address the issue. Congress may still be asked to address key issues that are unclear, such as whether thresholds similar to South Dakota’s should be imposed, whether the tax enforcement requirements are prospective only, etc. Some view Congress’ involvement as important to ensuring small businesses are protected from being overburdened by tax collection and reporting requirements.

The full effect of the Supreme Court’s ruling in Wayfair likely will not be seen or felt for some time. Much still needs to be decided, whether by the states, Congress or possibly the courts. However, businesses cannot afford to sit by wait until the dust settles as, one by one, the states may come a-calling. So be ready! n

Terry Barrett, CPA, is a tax senior manager at Keiter in Glen Allen. She focuses on state and local tax consulting, with a special interest in and emphasis on sales and use tax in the multistate arena.

tbarrett@keitercpa.com connect.vscpa.com/TerryBarrett (804) 273-6254 keitercpa.com