Supreme Court’s Wayfair case will impact Virginia businesses

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Print this page by Terry Barrett, CPA

Virginia businesses selling in a multistate environment may find that they have additional sales-tax requirements in the near future.  On April 17, the U.S. Supreme Court heard oral arguments in the case South Dakota v. Wayfair, Inc., et. al. (Docket No. 17-494).  At issue is whether South Dakota (or any other state) may impose sales-tax collection requirements on out-of-state sellers that have no physical presence in the state but merely are selling via the internet (or mail-order) to customers in the state.1   The court ruled in 1992 in Quill v. North Dakota that a seller must have a physical presence in a state in order to be required to collect and remit sales/use tax on sales to instate users.  Much has changed since 1992 in the way businesses sell products, and many states felt that the physical presence requirements are no longer relevant. 

The fact the court agreed to hear the case was viewed by many as a clear sign the physical presence requirements of Quill would be overturned.  However, the oral arguments and line of questioning by the justices on April 17 suggested the outcome of the case is uncertain and too close to call.  What was clear, though, were concerns by the justices over the potential retroactive application of their ruling, sales-tax compliance costs for small businesses, and the real magnitude of the revenues lost due to the physical requirement limitation.  The court’s decision is expected by the end of June.

The court has many options, including, but certainly not limited to: (i) overturning Quill and leaving it to the states to determine next steps, (ii) overturning Quill and setting certain parameters for the states to use (e.g., minimum thresholds, like South Dakota has — a certain level of revenue or number of sales transaction); and (iii) upholding Quill and leaving it up to Congress to act. When the Supreme Court ruled in Quill in 1992, it was suggested Congress would be the most appropriate body to address the sales-tax nexus issues. However, while legislation has been introduced several times over the years, Congress still has yet to come up with a solution.

Regardless of the court’s decision there is little (no) doubt that the issue will just fade away.  Even if the court decides to let the physical presence rules stand, it is expected the states will continue to more aggressively assert physical presence tax collection requirements due to in-state affiliates or referrers, click-through-nexus, attributional nexus and “cookie nexus.” Massachusetts enacted provisions asserting that nexus is created through accessing a website because customers download “cookies” (software) from the seller’s website.  Some states have imposed notice and reporting requirements on out-of-state sellers whereby the out-of-state seller must notify in-state customers that they do not collect sales tax and the purchaser is responsible for paying the tax directly to the Department of Revenue.  These notice requirements also often require year-end reports to customers and the state Department of Revenue advising them of the total purchases made by the customers (and thereby allowing the departments of revenue to pursue use tax payments from businesses and individuals alike).  There are penalties imposed for failure to comply with the notice requirements in several states.

If the Court overturns Quill, states obviously will pursue collection of the tax from remote sellers.  How, when, for what periods, are all questions that will have to be answered. 
While the court’s decision will hopefully be issued by the end of June, the full ramifications of it may not be known for some time.  To prepare for any outcome, however, Virginia businesses selling product or services in the multistate arena may want to determine:

1) Their sales by state — depending upon the sales threshold, they may be subject to notice and reporting requirements in some states (for example, Pennsylvania requires out-of-state sellers with $10,000 in sales to Pennsylvania customers in the previous year to notify those customers that they may have use-tax reporting requirements in the state because the seller does not collect Pennsylvania sales tax, and to send year-end notices to those customers and the state detailing the sales); this information will be helpful in  identifying states where filing requirements may be necessary if the court overturns Quill, and there are thresholds similar to South Dakota’s ($100,000 in sales or 200 transactions);

2) Where they have physical presence — This includes, but is not limited to, having offices, fixed assets, inventory stored in warehouses, inventory stored in third-party seller warehouses, sample products, leased product; employees who travel into the state to solicit sales, perform training, advise clients, etc.; employees who live in the state regardless of whether they are engaged in any sales solicitation or the performance of services for customers (having an employee perform back-office work does generally create sales tax nexus); independent contractors selling or performing in-state repair, installation or other services; in-state representatives who are not employees but who refer customers in exchange for a commission; in-state affiliates that may or may not be conducting the same or similar business operations; delivering software to instate recipients as some states take the position that software delivered electronically or merely accessed by an in-state user creates nexus for the seller; and

3) The taxability of their product/services in other states — Virginia generally has favorable sales-tax rules and exemptions; many states do not and many states tax services.  Some commonly taxed services include database/information services, data-processing services, software regardless of the mode of delivery, computer services and temporary help services. 

With the above information already collected (and continually updated as business operations shift and grow), Virginia businesses will be in better position to respond to the court’s decision — regardless of what it is.

1  South Dakota was the first state to enact legislation challenging the physical requirements of Quill.  The legislation imposes tax collection requirements on sellers having $100,000 or more of gross revenue from sales into the state or 200 or more separate transactions; no physical presence is required.

Terry Barrett, CPA, is a tax senior manager at Keiter in Glen Allen. She focuses on state and local tax consulting and primarily nonincome tax issues, such as sales and use tax and business-license and personal-property tax in Virginia and other states. She can be reached at tbarrett@keitercpa.com

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