Sales and Use Tax Five Years After Wayfair

By Derek Rawls, CPA, MST
Gray, Gray & Gray, LLP

The landmark Supreme Court decision in South Dakota v. Wayfair, Inc. in 2018 fundamentally altered the landscape of sales and use tax compliance for businesses with multistate sales. By overturning the physical presence requirement, the Court paved the way for states to require remote sellers to collect and remit sales tax on transactions within their borders, regardless of whether they have a physical presence in the state.

The Wayfair Decision: A Watershed Moment

Prior to Wayfair, the physical presence rule, established in the 1992 Supreme Court case Quill Corp. v. North Dakota, had shielded remote sellers from sales tax collection obligations unless they maintained a physical presence in the taxing state. This resulted in significantly less risk and compliance obligations for online retailers over brick-and-mortar businesses, as online sellers could effectively avoid collecting sales tax from customers in many states.

The Wayfair decision leveled the playing field by allowing states to impose economic nexus, which means that a seller’s substantial economic activity within a state, even without a physical presence, can establish nexus and trigger sales tax collection obligations. This shift in policy has had far-reaching implications for businesses of all sizes, particularly those that primarily conduct sales online.

Impact on Businesses

In the five years since Wayfair, businesses have grappled with the complexities of determining their sales tax nexus obligations and implementing streamlined compliance processes. States have also been adapting their sales tax laws and regulations to accommodate the new economic nexus standard.

One of the most significant impacts of Wayfair has been the rise of marketplace facilitators. These platforms, such as Amazon and eBay, facilitate transactions between buyers and sellers, often acting as the seller of record for transactions. As a result, marketplace facilitators have become responsible for collecting and remitting sales tax on behalf of sellers, simplifying the compliance process for many businesses.

However, the increased complexity of sales tax compliance has led to challenges for businesses, particularly smaller ones, in keeping up with evolving regulations and ensuring accurate tax collection. Many businesses have turned to tax software and consulting services to help them navigate the complexities of sales and use tax compliance.

Emerging Trends and Continued Evolution

As the sales tax landscape continues to evolve, several emerging trends are worth noting:

• States are adopting more complex economic nexus standards. While some states have adopted simplified economic nexus standards based on sales thresholds or transactions, others have implemented more nuanced standards that consider factors such as the number of customers or the amount of revenue generated in the state. For example, in Massachusetts, if a remote seller’s Massachusetts sales in either the prior or current calendar year exceed $100,000, it must register as a vendor, collect tax on its Massachusetts sales, and remit the tax to the state’s Department of Revenue.
• States are increasingly using technology to enforce sales tax compliance. States are investing in technology to identify remote sellers with nexus in their states and to enforce collection obligations. This includes using data analytics to identify potential non-compliant sellers and conducting audits to ensure compliance.
• States are simplifying sales tax registration and compliance processes. Many states are streamlining their sales tax registration processes and providing online tools to help businesses comply with their sales tax obligations. This includes simplifying registration forms, providing online filing and payment options, and offering educational resources and guidance.

The Wayfair decision has ushered in a new era of sales and use tax compliance for businesses with an online presence. While the landscape continues to evolve, businesses can navigate the complexities by staying informed about changing regulations, utilizing technology solutions, and seeking guidance from tax professionals. By taking proactive steps to manage their sales tax obligations, businesses can protect themselves from potential liabilities and ensure compliance with state and local tax laws.