We wrote our initial analysis of South Dakota v. Wayfair on June 21, 2018. Since the Supreme Court issued its Wayfair, we have heard from clients with sales into sales tax-imposing jurisdictions who are concerned about what this means for their businesses.
Many states already had tax systems that would require a seller with no physical presence in their state to collect sales tax, which was the core issue in Wayfair. Other states (for example, Louisiana, North Dakota, and Vermont) adopted systems that would only go into effect if Wayfair was decided in a way that eliminated the physical presence requirement that the earlier Quill Corp. case had endorsed. Not all states had taken proactive measures to implement sales tax economic nexus. Some states are adopting additional, parallel nexus tests in the wake of Wayfair.
California, for example, did not adopt sales tax economic nexus thresholds prior to Wayfair. As it’s a significant market state for many companies, we have eagerly awaited guidance from state revenue authorities about what it will do following Wayfair. The California Department of Tax and Fee Administration (“DTFA”) accidentally posted draft rules containing guidance that requires retailers to register with the DTFA if they deliver $100,000 or more of products into California or if they sell tangible personal property into California in 200 or more separate transactions. These are the same thresholds adopted in Wayfair. This inadvertent guidance also said that the effective date of the rules would be August 1, 2018. California pulled the guidance off its website, so we don’t know what the final thresholds are going to be as of this date.
Washington, on the other hand, did adopt economic nexus standards prior to the issuance of the Wayfair decision. What they’ve chosen to do, post-Wayfair, is layer one on top of the other. The Washington Department of Revenue published guidance on July 1, 2018, that leaves them with a two-prong nexus regime. The first prong is essentially the same thresholds as South Dakota – Retail vendors must collect and remit sales tax if they have $100,000 of sales into Washington or engage in 200 or more transactions. These requirements are effective for periods October 1, 2018 and subsequent. However, due to economic nexus standards already in place in Washington, there is a second prong whereby, if a vendor does not rise to the level of activity of the first prong with the state, but has a mere $10,000 of sales into the state, the vendor must either: (1) collect and remit sales tax to the state or (2) comply with use tax notice and reporting requirements (i.e., disclosure of Washington customers to the Department of Revenue to aid in use tax compliance initiatives).
We expect that as other states adopt nexus standards similar to that in the Wayfair decision, we will also see some variation in the effective date of such legislation. Most of the states that have adopted legislation already seem to advocate for prospective application. Essentially, they pick a date and the new standards apply for transactions after that date. However, because some states have explicitly said that they will apply their taxing authority to the full extent of the law, the specter of retroactive application still exists. This means, that a state could assess a vendor for failing to collect sales tax on a transaction that occurred prior to the issuance of the Supreme Court’s Wayfair decision. While this seems unfair, we’ve seen application of nexus standards for income tax retroactively in several jurisdictions. We will continue to update you as these new rules evolve.
Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.