Internet sales tax law changing
Michael P. Duffy
The U.S. Supreme Court decision in June in the South Dakota v. Wayfair, Inc. case repealed the previously required sales tax physical presence standard. In doing so, the Supreme Court opened the door for states to impose a sales tax collection obligation on large and medium-sized out-of-state retailers operating over the internet.
The amount of connection a party needs to have with another state in order for that state to tax under the U.S. Constitution is called nexus. Up until late June of this year, the Supreme Court provided nexus for sales tax purposes required a seller to have at least a minimal physical presence in the state of a customer.
Last month's Supreme Court decision in South Dakota v. Wayfair, Inc. formally repealed this physical presence requirement. In doing so, the Supreme Court significantly expanded the potential burdens for businesses operating over the internet.
Specifically, for Massachusetts businesses, the primary consideration is sales of tangible personal property and certain services into 20 other states may now be subject to sales tax, even if the seller otherwise has no connection in the state of the customer.
The Wayfair decision did not precisely outline what the new nexus standard is for sales tax purposes, providing only physical presence is no longer required. The statute being challenged in Wayfair required vendors selling goods to South Dakota customers to collect sales tax if they either had at least $100,000 in annual sales to in-state customers, or alternatively 200 or more separate orders to customers over the same period of time.
The Supreme Court indicated various factors mitigated the compliance burdens on out-of-state sellers who had a sufficient amount of sales to South Dakota-based customers. For instance, it noted South Dakota offered free compliance software to internet sellers, was a member of the Streamlined Sales and Use Tax Agreement conformity initiative, and enforcement of the nexus standard would not begin until the constitutionality of the law was settled.
Although it is technically still an open question as to whether $100,000 in sales to customers in a state is constitutionally sufficient to create sales tax nexus, businesses should assume these sales thresholds are sufficient to establish nexus going forward and should be prepared to adjust their sales tax compliance procedures accordingly.
The number of states with statutes imposing a collection and filing obligation on out-of-state sellers crossing a hard sales or transaction hurdle will almost certainly increase over the next six months.
But, where Massachusetts internet retailers may face the most challenges is not in figuring out which states they may have to begin collecting sales tax in, but rather, figuring out what transactions may now be considered taxable halfway across the country. Sales tax is usually due on the sale of tangible personal property in most jurisdictions, but states may offer very different exemption opportunities compared to Massachusetts and other New England states. Alternatively, services, software or digital goods may unexpectedly be subject to sales tax in remote states as well. And lastly, sales tax audits represent an enhanced risk for businesses, because there is a possibility that a seller can end on the hook for a tax burden that should ultimately be borne by customers. In any event, companies that have, up until now, been counting on a lack of physical presence to manage their possible sales tax exposure should consider doing a deep dive.
Michael P. Duffy is a tax attorney at Worcester law firm Fletcher Tilton. Reach him at mduffy@fletchertilton.com or 508-459-8043.
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