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On Thursday, June 21, 2018, the U.S. Supreme Court decided the
South Dakota v. Wayfair, Inc. case, holding that internet
retailers can be required to collect sales tax in states where they
lack a physical presence. This overruled longstanding precedent
from 1992 in Quill Corp. v. North Dakota that required a
retailer to have a "physical presence" in the state in
order for a state to require them to collect and report sales tax,
often referred to as "sales tax nexus." The Court in a 5
to 4 decision noted that times have changed, that Quill
was decided when the internet as we know it did not exist, and that
states continue to lose revenue because internet retailers have an
unfair advantage over "brick and mortar" retail
stores.
Since 1992, states have been creative in trying to work around
the "presence" requirement. In light of the increasing
competition from online remote sellers, "presence" has
been extended to include a number of activities beyond simply
having a "brick and mortar" store or warehouse in the
state. For example, if a company has sales people in the state, if
an online site puts "cookies" on a customer's
computer ("cookie nexus"), or if a site offers a link to
the retailer's website ("click-through nexus"), the
"presence" test may be met. More recent developments have
included efforts to impose "use tax" reporting
requirements on retailers. Such retailers will now be required to
submit detailed reports listing sales made to in-state consumers,
so states have the information needed to collect "use
tax" directly from those consumers.
The Wayfair decision brings us into new territory and
will open the gates to disparate laws throughout the country. This
raises some important issues for your company:
When will states begin passing new laws to impose such
collection and reporting obligations and how will this impact
online retailers?
What thresholds will apply and will they apply to your
company's sales activity or will some exemption apply?
What protocols will your company have to put in place in order
to comply with 50 different sales and use tax regimes?
Will the states try to enforce these sales tax collection and
filing rules retroactively and, if so, for how many years
back will they go?
If these new rules impact your sales tax reporting, withholding
and remittance obligations, will they also create nexus for
income tax purposes?
Until Congress acts to address this lack of uniformity, a
continuing analysis of each state's rules and obligations will
be required to determine how they apply to your company's sales
activities going forward and possibly retroactively. Our Tax
Practice Group performs nexus analyses and is here to provide
guidance.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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