NEW RULES
How To Conduct Business After
The South Dakota v. Wayfair Decision
O
n June 21, after hearing the arguments
on both sides of the South Dakota v.
Wayfair case, the U.S. Supreme Court
issued a monumental ruling in favor of South
Dakota. Today, many business owners are
questioning how sales across state lines will
impact their bottom lines.
To understand the impact of this deci-
sion, you have to throw out everything you
thought you knew about a business’s physi-
cal presence in a state. Now, state legisla-
tors can require businesses that sell more
than $100,000 worth of goods or services
into a state in a year or complete 200 or more
transactions into their state over a 12-month
period, to register with the state and com-
ply with their state’s tax laws. This new rule
doesn’t just apply to online retailers either. All
businesses that sell into states that have ad-
opted the new regulations will be impacted.
Some legislators have even said a business’s
online presence might be enough to establish
nexus in a state. For example, if a resident of
a state visits your website and you track their
visit with cookies, the state could argue that
the cookie is enough of a physical presence
to result in nexus. Additionally, if you gener-
ate click referrals to your business’s website
by placing online ads that target residents in a
particular state, the ad is equivalent to having
physical presence in a state.
Using a third party to sell your products won’t
work either. States have said that if a busi-
ness uses a third party, such as Amazon, and
the third party stores your company’s inven-
tory in another state, you would be held to
the same sales taxes as the third-party seller.
WHAT ELSE DO YOU NEED TO KNOW?
• Though states can constitutionally impose
this rule, they still have to have a law on
their books to do so. Most states already
include some language asserting that
you have nexus “to the extent permitted
by the U.S. Constitution” or similar lan-
guage. Even without a specific Wayfair law,
most states could argue that their law, as it
is today, permits this treatment.
• Companies that obviously have nexus but
choose not to register or collect sales tax
in other states may need to include finan-
cial statement disclosures in their audited
financial statements.
IMMEDIATE CONSIDERATIONS
• Consider your risk in each state you do
business in. Ask yourself, if you were to
register or be caught by the state, what
would be the result?
• If you primarily sell to wholesalers, keep
good exemption certificate records. This
way, registering with the state might just
be an administrative issue. You may have
to go through the process of defending the
audit, but as long as your documentation is
good, that might be it.
• If you sell to end users, find out if your
product or service is taxable in each state
you do business in.
Scott Zielaskiewicz,
indirect tax manager,
[email protected]
(Medina office)
• Determine if your customers have an ex-
emption for their use of your product or
service in their state. If so, keep good re-
cords of exemption certificates.
• Make sure your software can accurately
report sales by state, county, etc. Know if
you are sourcing sales in accordance with
each state’s rules on sourcing, and if your
software can handle taxable and nontax-
able sales.
• In states where risk is high, ascertain
whether you should register going for-
ward, pursue a voluntary disclosure or
simply wait and see what happens. If you
choose not to take action in states where
you have nexus under Wayfair, determine
whether your auditing team will be re-
quired to add a disclosure to your finan-
cial statement or if you need to consider
an accrual for sales tax.
It’s especially important to take time to as-
sess your business’s specific situation and
tailor a plan with your tax advisors to mini-
mize risk and put you in the best position for
continued success.
Rea’s state and local tax team can highlight
areas of exposure and help you define an
action plan of items to address immediately
while identifying what can be implemented
over time.
• Break out your invoice price to contain the
risk associated with things that are actu-
ally taxable (many states fully tax mixed
transactions).
Listen to episode 143 of unsuitable on Rea Radio, “extreme nexus: south dakota v. wayfair,” to learn more
about the Supreme Court’s decision from Rea’s director of state and local tax services, Joe Popp, JD, LLM.
www.reacpa.com/episode-143
4