Wayfair and Sales Tax Nexus: The Aftermath Part 2|
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Eleven more states will begin enforcement of their economic nexus sales tax rules beginning on Oct. 1, 2018.
In our July 2018 SALT Newsletter, we wrote about the flurry of state activity leading up to and immediately following the United States Supreme Court decision in South Dakota v. Wayfair. Guidance continues to be published by the states, and we are beginning to see more substantive regulations to provide taxpayers with a better understanding regarding the application of these rules. Not surprisingly, however, there is no uniform treatment among the states, and there is no doubt that this will make future compliance more complex, confusing and costly. This article looks at two of these issues and the different paths that states are taking.
Before discussing those two issues, however, I would like to point out a couple of important developments in this area. First, there are 11 states that are beginning enforcement of their Wayfair rules beginning on Oct. 1, 2018: Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Nevada, North Dakota, Washington and Wisconsin. These states join Hawaii, Maine, Mississippi and Vermont, which are already enforcing their Wayfair rules.
Second, on Sept. 13, 2018, a bipartisan bill entitled “Online Sales Simplicity and Small Business Relief Act of 2018” was introduced in Congress. The bill has two main points in response to the Wayfair case: (1) It would prohibit retroactive sales tax collection obligations for remote sellers on sales prior to June 21, 2018, and it also would allow states to impose a sales tax collection obligation for remote sellers ONLY on sales that occur on or after Jan. 1, 2019 (not sure why both statements are necessary since the second rule would seem to trump the first rule); (2) Unless the states develop and Congress approves an interstate compact for the collection of sales tax by remote sellers, remote sellers with no more than $10 million in annual sales would be exempt from any collection obligations. Given that over 15 states are going to be enforcing their economic nexus rules by Oct. 1, 2018 (with others still to come on or before Jan. 1, 2019) it seems very unlikely that this bill will pass in its current form.
Calculating the Sales Revenue Threshold
One of the overriding questions on which taxpayers and practitioners are seeking guidance is which sales are included in the gross revenue threshold calculation. The states use a variety of sale types with regard to the calculation, including, but not limited to, sales of (i) tangible personal property, (ii) services, and/or (iii) products transferred electronically. However, even within those categories, there are issues as to which kinds of sales count. For example, what about sales for resale (or other exempt sales) or sales made on another party’s online marketplace?
Illinois issued emergency regulations effective on Sept. 11, 2018, and which are effective for 150 days. Those regulations exclude from the threshold calculation receipts from the following sales:
- Sales for resale
- Sales of property required to be registered with a state agency, such as motor vehicles
- Occasional sales – sales of property not normally sold by the retailer in the regular course of business (e.g., a computer manufacturer sells a piece of manufacturing equipment)
- Sales that are subject to tax (i.e., sales on which the remote retailer is required to collect and remit). For example, sales made by a remote seller while attending an Illinois trade show do not count since the remote seller is require to collect and remit sales tax on those sales.
Otherwise, all other sales, even other sales that are exempt, must be included in the threshold calculation. Thus, sellers must begin to properly categorize their sales so they can identify which ones count toward the threshold and which ones don’t.
Contrast that with South Carolina’s new revenue ruling that was released on Sept. 18, 2018. South Carolina is beginning enforcement on Nov. 1, 2018, and has instituted a $100,000 sales proceeds threshold, but no transaction threshold amount. That ruling makes clear that the total gross proceeds of all taxable and nontaxable sales of tangible personal property, products transferred electronically and services count toward the state’s $100,000 threshold.
In addition, the state specifically included proceeds from sales of products owned by the remote seller but sold by another party (e.g., an online marketplace that lists the remote seller’s products for sale and processes and collects payments from purchasers) in the threshold calculation for the remote seller. For example:
Assume a remote seller makes sales on his own website. He also lists his products for sale on a marketplace that has economic nexus with South Carolina. The remote seller sells $75,000 of items into South Carolina via his own website. A marketplace makes sales of $50,000 of products owned by the remote seller into South Carolina, and the marketplace collects or processes customer payments from these marketplace sales. The remote seller has economic nexus with South Carolina based on $125,000 of sales and must collect and remit on its $75,000 of direct sales.
The Measurement Period and Collection Requirements
One procedural issue that is being handled differently among the states is the period for measuring the threshold and when that creates the requirement to begin collecting tax. Many states, but not all, require remote sellers to measure their sales in the prior calendar year and the current calendar year, and if within either period, the sales revenue exceeds the state’s threshold, the requirement to collect and remit begins. For example, if a remote seller reaches a state’s threshold on Oct. 7, 2018, then the remote seller has nexus on that date and must register and begin collecting and remitting for all taxable sales after that date. In addition, the remote seller’s economic nexus will carryover for all of 2019.
South Carolina’s guidance provides a small grace period for remote sellers. It provides that remote sellers that establish economic nexus are required to remit sales tax for all sales made beginning on the first day of the second month following the month in which economic nexus is established. For example, a remote seller that hits the state’s $100,000 threshold on Dec. 10, 2018, is not required to begin collecting sales tax until Feb. 1, 2019, and the remote seller must be registered by that date.
Illinois takes a completely different approach, requiring remote sellers who do not have economic nexus to measure their sales at the end of each calendar quarter for the prior 12-month period. Once the economic threshold is met, registration, collection and remittance begins for all sales starting the next day.
For example, a remote seller that, on March 31, 2019, meets the $100,000 threshold for the period April 1, 2018 thru March 31, 2019, must begin collecting and remitting on sales made beginning April 1, 2019. That remote seller must collect and remit for a full year and then will re-measure. So, in this example, the remote seller will measure sales for the period April 1, 2019 through March 31, 2020. If the threshold is met, the remote seller will continue collecting and remitting for another year.
If the threshold is not met, the remote seller may discontinue collecting and remitting, and must notify the state of that decision. The guidance strongly recommends that remote sellers continue to collect tax as a courtesy to consumers, and it provides that remote sellers may be able to change their filing frequency in accordance with existing regulations. If a remote seller chooses not to collect, it must go back to measuring its sales at the end of each quarter for the prior 12-month period to determine if the threshold is met in the future.
Illinois and South Carolina are just two examples of how states are treating issues related to the economic nexus threshold calculation, and the guidance in these states may change in the future. If you believe that your business may have sales tax collection obligations as a result of Wayfair and subsequent state guidance, NOW is the time to act! Contact an Aprio SALT specialist to examine your situation, determine your sales tax compliance requirements and assist you with handling your sales tax compliance function (i.e., getting registered, filing sales tax returns, etc.).
At this time, after the 11 states listed above, at least another 10 states will begin enforcing their sales tax economic nexus rules on or before Jan. 1, 2019, and there will be others. Aprio’s SALT team can put you on the right track now so that you don’t incur unnecessary costs and tax liabilities trying to deal with this after it is too late. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
Check out all Aprio articles on Wayfair and its aftermath here.
Interested in speaking with someone? Contact Jeff Glickman.
This article was featured in the September 2018 SALT Newsletter.
 H.R. 6824.
 86 Ill. Admin. Code 150.803(c)(3)(E).
 The $75,000 of sales may need to be included in the nexus calculation of the online marketplace provider. We will be address nexus issues for online marketplace providers in an upcoming issue of the SALT Newsletter.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.