Wayfair and the State Sales Tax Landscape

When South Dakota v. Wayfair was passed in June of 2018, states jumped on the chance to collect sales tax from eCommerce businesses and other remote sellers. However, one year later, much is still unclear about how states should enforce new laws and guidelines associated with the Supreme Court decision.

The general lack of clarity from the Court’s decision combined with the difficulty of achieving standardization from state to state leaves remote sellers and the states themselves unsure of how to proceed.

Changes Following South Dakota v. Wayfair

Prior to the Wayfair ruling, states were unable to collect sales tax from remote sellers. This understandably left a large gap in potential income for states with the rise in eCommerce businesses and sales in general.

The Supreme Court’s ruling provided the opportunity for states to collect income on interstate commerce, leaving room for states to create new sales tax guidelines and clarify existing ones. 

One year later, the majority of states have taken advantage of the ruling, either actively collecting sales tax or awaiting collection pending their new legislation taking effect. 

Establishing Nexus for Sales Tax

The largest barrier most states and remote sellers face is clear guidelines in state legislation regarding the establishment of economic nexus. Establishing nexus refers to the point at which a business with no physical presence or employees in a state conducts enough business to warrant the collection of sales tax. Nexus is essentially the trigger that requires remote sellers to report sales tax to a state.

States, therefore, cannot enforce sales tax collection until economic nexus standards are clearly defined and in place. Luckily, states already have a framework to establish nexus based on income tax thresholds. The most basic route would be to tie nexus for income tax to sales tax, requiring remote sellers to file both once they meet a state’s established criteria.

However, income tax and sales tax don’t have the same thresholds, and requiring businesses to file both categories has the potential to be detrimental to businesses that establish nexus for sales tax but not income tax. The most economically beneficial route, therefore, is to create a separate nexus for sales tax and income tax.

Much-Needed Direction

In order to streamline requirements and make Wayfair more beneficial for states and remote sellers, further guidance from Congress is needed. At this point, much is left to interpretation for both states and remote sellers, making it difficult to standardize compliance.

Congress has the ability to further clarify filing requirements and take much of the guesswork out of establishing new practices. Lack of clarity also places undue strain on businesses that aren’t necessarily large enough to have dedicated tax departments to sort out each state’s laws. While larger businesses can afford to navigate the new sales tax landscape, mom and pop businesses and start-ups are less equipped.

Pending legislation from Congress, many states are simply monitoring the success of their neighbors. The states that enacted legislation the fastest seem to be relying on marketplace facilitators to collect and remit sales tax of remote sellers. These marketplace facilitators remove some of the burden from states who would otherwise need to track and collect individually from each business.

Time alone will reveal the effectiveness of the current sales tax landscape following South Dakota v. Wayfair. In the meantime, it will be interesting to see which states succeed in creating standardized guidelines and whether or not Congress will step in to mandate legislation across states.