Many businesses, including manufacturers, that buy or sell products across state lines are affected by the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair. In this decision, South Dakota’s “economic nexus” statute that requires certain out-of-state sellers to register for and collect sales tax in the state (even if they lack a physical presence there) was upheld.
How Will Your Business Be Affected?
A state’s constitutional power to impose tax obligations on businesses generally extends only to those that have a substantial connection with the state. Establishing a sales tax nexus once required a physical presence — retail stores, manufacturing or distribution facilities, employees or sales representatives — in the state. Post-Wayfair, however, means virtual or economic contacts are sufficient to establish a nexus.
Any business that sells its product or services in a state, regardless of how orders are placed, is potentially affected by the Wayfair decision. Sales tax collections are not automatically required for all sales. But you will need to research whether the states in which you do business have enacted economic nexus statutes and if your activities meet the applicable thresholds.
The Supreme Court did not create a bright-line test for the level of activity required to establish a sales tax nexus. It simply concluded that South Dakota’s threshold statute — $100,000 in gross sales or 200 transactions — was constitutional.
Most states have enacted economic nexus statutes that apply similar thresholds after Wayfair. However, this may be confusing if you operate in multiple states because there are variations from state to state.
What About Sales That Are Exempt?
Sales taxes are typically imposed on retail sales only. Products intended for resale are often exempt from sales tax. Many states also provide exemption for products sold for use in a manufacturing process. Some manufacturers sell retail products, but it’s also common for their sales to qualify for a resale or manufacturing exemption, as well.
This does not always mean that you have no concerns just because your sales are exempt. Some states’ nexus thresholds are based on gross sales (rather than taxable sales). You may be required to register as a sales tax vendor in these states. In this case, you will have to file a sales tax return showing zero liability and maintain documentation showing your exemption eligibility if your sales are exempt.
Does Wayfair Impact Purchases?
To answer this question, evaluate your individual situation. If your state has enacted an economic nexus statute, and you purchase equipment or materials from out-of-state sellers, those sellers may begin collecting sales tax.
However, you won’t be charged sales tax if your purchases qualify for a manufacturing or resale exemption, but you will need to present sellers with an exemption certificate to qualify.
Can Other Taxes Be Triggered by Registration?
Depending on the states in which you do business, you may be subject to income or franchise taxes. Those taxes are by a different set of nexus rules.
Wayfair does not directly affect your liability for income or franchise taxes. Registration as a sales tax vendor might prompt a state to send you a nexus questionnaire for those taxes, unfortunately, thus exposing you to additional tax risks.
Evaluating your sales tax obligations can be time-consuming and overwhelming. Contact us and we can help you weigh compliance costs against the advantages of continuing business in states where you have an economic nexus.
Economic Nexus Since the Wayfair Decision: Frequently Asked Questions About Sales and Use Taxes (Part 1)
The South Dakota v. Wayfair, Inc., decision and economic nexus laws have changed the landscape for taxpayers who sell…
The United States Supreme Court, in South Dakota v. Wayfair, Inc., overruled the decades-old physical presence nexus…