South Dakota v. Wayfair, Inc. Tax Implications

On Thursday June 21, 2018, the Supreme Court issued its much anticipated opinion in the landmark case of South Dakota v. Wayfair, Inc., fundamentally changing the sales tax landscape in the United States.

The Case

South Dakota enacted a law requiring out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in the state. The law only applied to sellers who, on an annual basis, delivered more than $100,000 of goods or services into the state or engaged in more than 200 separate transactions for the delivery of goods or services into the state.

South Dakota sought to enforce the law against Wayfair, Inc. and other online retailers who exceeded the limits of the law. Each of the retailers had no employees in the state and owned no real estate in the state.

Based on prior precedents (National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, and Quill Corp. v. North Dakota, 504 U.S. 29), the lower courts ruled that the law was not enforceable due to the lack of substantial nexus* with the state under the “Physical Presence” test outlined in these cases.  That test allowed states to require retailers to collect and remit sales tax if the retailer had a physical presence (e.g., employees or operating an office) in that state. The mere shipment of goods into the state did not satisfy the physical presence test.

The Result

In a 5-4 verdict, the Supreme Court explicitly overruled the prior cases and held that, while physical presence provided substantial nexus, such nexus also included a certain level of business (delivery of goods or services) conducted within the state.

The Court found that, in this case, the nexus is clearly sufficient based on both the economic and virtual contacts the retailers have with South Dakota. The state law applies only to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the state on an annual basis.  This quantity of business could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.  The retailers are large, national companies that undoubtedly maintain an extensive virtual presence.  Thus, the substantial nexus requirement is satisfied.

The Implications

Will you now be required to collect and remit sales taxes in states to which you deliver goods or services?

South Dakota v. Wayfair, Inc. allows all states to enact laws requiring out-of-state sellers to collect and remit sales taxes on sales to customers in that state provided the law applies a safe harbor to those who transact only limited business in the state.  While South Dakota chose an annual $100,000/200 transaction limit that the Court found sufficient, the Court created a level of uncertainty by leaving it up to the states to decide what safe harbors might be sufficient.  We expect we will see a great deal of activity as various states make their statutes consistent with the court’s ruling so nexus can be asserted.  For states that already have similar statutes in place, it is unclear whether they will set a future date for enforcement or take the position that the statute has been enforceable since it was put in place.

*Nexus – When referring to sales tax, means that a company is connected to a state and because of that connection, a company must collect tax, fill out a tax return, and send the collected tax to a state.

Given that sales tax laws are established on a state-by-state basis, all businesses making sales of goods or services to customers in multiple states should evaluate the impact of the Court’s holding. 

This ruling is just the beginning of the process and over the coming months we will be monitoring which states are adopting these types of nexus rules and when they will become effective. If you would like more information on how this may impact your business, contact us today.

The Impact of Increased Take Home Pay on Your Tax Return

What could increased take-home pay mean for your 2018 tax return?

The recent tax reform has instituted a variety of changes in both individual taxes and business taxes starting in 2018. Many Americans can expect a decrease in tax, and with the new federal withholding tables released earlier this year, an increase in take home pay. Less tax and more pay, what’s not to like?

The goal of this change in federal withholding tables was to adjust for the new changes that will impact individual taxpayers. Some of the major changes include a decrease in tax rates, an increase in the standard deduction, and a repeal of personal exemptions.

However, we have found that the change in withholding may not be enough to cover tax liability in many cases. In the past, many relied on Form W-4 without much extra thought to get them close to the amount needed to pay their tax. This year, we suggest analyzing it a little further. Taxpayers may get less of a refund than they are used to or even owe tax in April 2019, even though their tax rate is lower.

Example: Vince is single, has no dependents, and earns $50,000 in wages in 2017. He is paid on a bi-weekly basis. The result is $296 in federal income tax being withheld from each paycheck or $7,707 withheld for the year. Vince’s actual tax liability, including the 2017 standard deduction of $6,350 and exemption of $4,050, is $5,645. This gives Vince a refund of $2,062.

Under the new tax law, assuming the same income, the 2018 standard deduction of $12,000 and no personal exemption, Vince’s tax liability will be $4,370. Due to the withholding changes implemented in February, Vince’s federal income tax being withheld for the year will be $6,247 (The above $296 for two pay periods and the new rate of $236 for twenty-four pay periods). This gives Vince a refund of $1,877.

As you can see above, although Vince’s tax liability decreased $1,275 from 2017 to 2018, he receives less of a refund. This example does not take into account any extraneous circumstances such as investment income, itemized deductions or dependents that many taxpayers have. If Vince has other sources of income and got a smaller refund for 2017, he could owe tax for 2018.

Luckily, the IRS has released a tax calculator to help check how much you should be withholding in 2018. If you are not familiar with how to use the calculator, this video will demonstrate how.

If you identify a needed change in your withholding, please contact your employer to fill out a new Form W-4. LBA Haynes Strand can also provide additional analysis and answer any other questions you might have about this subject.