3 Ways that SD v. Wayfair Will Impact Retailers (And What To Do About It)

On June 21, 2018, the U.S. Supreme Court handed down a decision with sales tax ramifications for retailers of all types. In South Dakota v. Wayfair, the Court effectively struck down the physical presence requirement that was the law of the land when it comes to sales tax nexus.

Much of the discussion around the Wayfair decision has revolved around the impact of the Court’s decision on remote sellers, including online sellers and individuals making sales through online marketplace providers, such as Amazon.

But Wayfair’s impact actually reaches much farther than just online sellers. Any out-of-state seller making sales into a state that has enacted economic nexus legislation needs to be aware of the new nexus obligations they may be creating. You see, Wayfair has essentially paved the way for states across the U.S. to enact economic nexus legislation.

Economic Nexus

Not familiar with economic nexus? Here’s the gist of it: Economic nexus legislation generally correlates with a set level of sales or gross receipts activity within the state, or a “threshold.”

For example, a state’s economic nexus legislation may set that threshold at $100,000 of sales into the state or 200 or more separate sales transactions in the state in the previous or current calendar year.

So in this example, if you’re a retailer who has met either of those thresholds in the previous or current calendar year, you have nexus in that state and are required to collect and remit sales and use tax on sales into that state. Now, imagine that you’re making sales into numerous states that have enacted economic nexus legislation. Things could get hairy quick.

In a post-Wayfair world, retailers need to be fully aware of the impact this monumental court decision can have on their operations. With that in mind, here are three ways that South Dakota v. Wayfair will impact retailers and what to do about it.

#1 – Physical Presence Is No Longer the Sole Nexus Standard for Retailers

Before the Wayfair decision, physical presence was the law of the land when it came to sales tax nexus. If you had physical presence in a state, then you had nexus in the state and were required to collect and remit tax on taxable sales made into that state. That’s pretty straightforward.

Then remote seller nexus legislation came along, which includes numerous types of legislation, not just economic nexus. So is physical presence in a state still relevant for sellers when it comes to nexus? Yes, absolutely. If you have traditional physical presence in a state – which includes much more than just having a brick-and-mortar store in a state – then you are still creating nexus for sales tax purposes in that state.

Activities such as attending a trade show, delivering products in your own truck, doing installation or repair services even if just for a few days in a state create physical nexus.  And remember it doesn’t have to be your own employees – if you use independent agents to do any of these activities or sales solicitation, this is also physical presence.

However, retailers now need to be aware that physical presence is no longer the sole standard for nexus in a state. The U.S. Supreme Court has cleared the way for states to enact economic nexus legislation, and the states are not wasting any time.

So what do retailers need to do about this? Retailers should still evaluate whether they are meeting the physical presence standard in states where they do business. If you do meet the physical presence standard in a state, then the economic nexus threshold in that state may not matter.

For instance, if you do not meet the economic nexus thresholds in a state but you have physical presence in the state, then you have created nexus there even though you don’t meet the economic nexus thresholds. Which brings us to our next point…

#2 – Retailers Must Calculate Their Sales Volume In Economic Nexus States

Now that the Wayfair decision has been handed down, retailers need to act immediately. The first step is to calculate your sales volume in states that have passed economic nexus legislation. (We’ll show you how to figure out which ones those are in a moment.)

Economic nexus legislation typically includes two thresholds – sales by dollar amount and by number of sales transactions into the state. So retailers should calculate their sales volume into the states – both the total dollar amount of sales for the specified period as well as the count of their sales transactions (invoices) in the state.

Be aware that these thresholds may not be as straightforward as they seem. For instance, does the state specify that the threshold is for gross sales or for retail sales? This can be ambiguous when it comes to determining some states’ thresholds, and it can have a big impact on whether you meet a threshold. You’ll want to consult the state’s legislation, and in some cases, additional guidance provided by the state, such as notices provided on the state’s Department of Revenue website.

Also be aware that in most states’ legislation, economic nexus applies if you meet either of the thresholds outlined in the legislation, not both of the thresholds. For additional guidance on economic nexus legislation and to see a state-by-state breakdown, visit our Remote Seller Nexus Chart and Remote Seller Resources page.

#3 – Determining the Taxability of the Products You Sell Has Become Extremely Important

The Wayfair decision does not only affect online sellers, it affects anyone who sells anything, whether it’s tangible goods, digital goods, software, services, and much more. As a result, the taxability of whatever you sell has become much more important to determine.

One of the big keys here is product classification. What exactly is it that you are selling? How do the states classify the products or services that you are selling?  Unfortunately, the states don’t always provide a lot of clarity or consistency on product classification.

But there is a helpful resource that can aid in determining your product classification. The Streamlined Sales Tax Agreement provides a standard definition for items like food, drugs and clothing in states that participate in the Agreement. And all the Streamlined Member States are required to provide taxability matrices for the defined terms in the agreement.

So why is product classification more important now than ever before? Because it affects the rate you charge, or could even impact whether you can save your company and customers money! You could have nexus in a bunch of states, but if the classification for what you are selling is exempt, there may not be a need to register to collect and remit sales tax.

Also, knowing which items you sell are taxable and which are exempt can come in handy when determining if you meet the economic nexus threshold in a state. If the state specifies that only taxable sales apply towards the threshold, then you can more accurately determine whether or not you meet one of the thresholds.

Posted on October 15, 2018

About the Author:

Diane L. Yetter

Founder of the Sales Tax Institute

Diane L. Yetter is a strategist, advisor, speaker, and author in the field of sales and use tax. She is president and founder of YETTER Tax and founder of the Sales Tax Institute. You can find Diane on LinkedIn and Twitter.