South Dakota v. Wayfair
by November 14, 2023
Please note: This blog was originally published in 2018. It’s since been updated for accuracy and comprehensiveness.
On June 21, 2018 the Supreme Court ruled that states could require online retailers with “economic nexus” in the state to collect sales tax from buyers in that state, even if the retailer had no other presence in the state.
South Dakota v. Wayfair set a far-reaching precedent and changed the world of e-commerce sales tax as we know it.
Now, three years later, states, e-commerce retailers, and other high-volume businesses are living in a new normal. We caught up with Lauren Stinson, National Leader of Sales & Use Tax at Cherry Bekaert and Diane Yetter, founder of Sales Tax Institute and Sales Tax Nerd, to find out how sales tax as we know it has changed since the day of the Wayfair decision.
Here’s how Wayfair impacted sales tax compliance.
E-commerce businesses lead compliance efforts
Let’s start with the good news. According to both Yetter and Stinson, e-commerce businesses are leading the pack when it comes to getting sales tax compliant under the Wayfair new normal.
This is perhaps because one party of the precedent-setting suit, Wayfair itself, is a product-selling e-commerce business, or perhaps because state laws are much more uniform when it comes to the sale of tangible personal property.
Stinson mentioned that technology companies, such as SaaS purveyors, were less likely than e-commerce companies to be totally compliant. Yetter added that business to business (B2B) and service based businesses are also complying in lower numbers than e-commerce businesses.
In their defense, while tangible personal property tends to be taxable in all states with a sales tax, state sales tax laws regarding technology and services are more fragmented from state to state. This, combined with a lack of understanding about the need for sales tax compliance, may be behind these companies’ slower path to sales tax compliance.
State sales tax enforcement
According to Stinson, states are still conducting their “business as usual” sales tax audits, but anecdotal evidence hints that they seem to be targeting remote sellers specifically.
Yetter mentioned that Illinois, Maine, Massachusetts and Wisconsin in particular have been aggressive about sales tax audits.
States eye registration dates
One head scratcher for businesses is often when to register for a sales tax permit. According to both Stinson and Yetter, states are increasingly scrutinizing nexus start dates. While many businesses still opt to list their nexus start date in a state as the day they register for a sales tax permit, or the day they realize they have nexus in a state, states are wising up to this tactic.
State auditors are increasingly comparing sales volume to nexus start date and aiming greater scrutiny at businesses that start with a high sales volume right off the bat (indicating that they may have had nexus sooner than reported).
Sales tax and business sales
Both Yetter and Stinson also mentioned that sales tax liability has become a concern during mergers and acquisitions. Now that Wayfair is the law of the land, buyers want to know that there aren’t going to be any scary sales tax surprises once they sign on the dotted line to purchase a new business. (Read our “What you Need to Know about Sales Tax when Selling Your Company” for more info.)
Businesses seek sales tax automation
According to Stinson, many businesses are now seeking both sales tax automation and advisory guidance from professionals like the ones mentioned in this article when it comes to getting and staying sales tax compliant.
Now that Wayfair is the law (or at least the precedent) of the land, businesses increasingly find themselves dealing with multiple states and multiple sets of sales tax laws. For example, e-commerce businesses with just 1,000 orders per month are estimated to have nexus in twelve states. This can be quite a change for smaller businesses who were accustomed in the past to dealing with the vagaries of sales tax in just one or two states.
Are you one of the increasing number of businesses seeking guidance from a sales tax professional? We recommend reaching out to a vetted sales tax expert.
To sum it up
The South Dakota v. Wayfair Supreme Court decisively changed sales tax as we know it, e-commerce businesses are doing what they’ve always done and rolling with the punches. Other types of businesses that may be subject to economic nexus, such as service or technology businesses, are less aware of their sales tax obligations and this could lead to a future reckoning.
States are continuing to seek out and audit noncompliant businesses, with anecdotal evidence showing that they are focusing on persuading remote sellers to comply.
Mergers and acquisitions have been affected by Wayfair, with purchasers now requiring due diligence when it comes to the target business’s sales tax compliance status.
One thing you likely don’t want to do as a business with economic sales tax nexus is fudge the date you crossed over that economic nexus sales tax threshold. (See each U.S. state’s economic nexus thresholds here.) Instead, if you’re concerned about paying uncollected sales tax out of pocket, we recommend speaking with a vetted sales tax expert like Stinson or Yetter who can assist with a voluntary disclosure agreement and negotiations with state departments of revenue.
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.
