In one of the most highly anticipated U.S. Supreme Court decisions last year, the Court’s ruling in South Dakota v. Wayfair opened the door for states to require internet retailers to collect sales tax. In doing so, the Court reversed a 50-year-old law that barred states from imposing sales tax on out-of-state purchases. Now, a physical presence (nexus) is not a prerequisite for a state to collect sales tax. Rather, the focus is on economic nexus. In Wayfair, the High Court rules that the economic nexus standard in South Dakota ($100,000 in sales or 200 transactions) is acceptable to require a taxpayer to comply with South Dakota sales tax laws.
Beyond Internet Sales
While the decision has obvious implications for internet retailers, what effect does the decision have for manufacturers? First, the ruling applies to any business selling goods and services to multiple states. If you have a physical presence in a state, the old rules still apply. You need to be registered to collect tax for all sales. That’s the easy part.
Now you will have to review your sales data to determine whether your sales volume is high enough to meet the economic nexus standards and reporting requirements. That’s where things become murky. Many states are following South Dakota’s lead in implementing a $100,000 economic nexus threshold. Others are implementing higher thresholds. Also, keep in mind that if one of your customers is buying your product and using it in a taxable manner, you would be required to collect sales tax and register for that tax.
Exemption Certificates Become More Complex
Manufacturers should expect increased reporting and compliance requirements on sales transactions, including resale exemption certificates from customers located in states where you don’t have an in-state presence. For example, are your certificates validated and retained in those states? As you know, a sale is taxable unless the customer can provide an accurate tax exemption or resale certificate. In the past, you just obtained the appropriate state certificate. Wayfair brought about economic sales tax nexus and state tax registrations, so you and your distributors may need to obtain applicable state-specific certificates for new states registered—no easy task when exemption certificate requirements vary from state to state.
Existing in a Non-uniform Nexus World
Manufacturers will have to assess their sales tax collection compliance based on each state’s nexus standards. This will call for more robust internal controls and reporting systems. For some manufacturers, it may make sense to automate systems to track interstate commerce across different states and jurisdictions.
This is no small task given changing exemptions and how each state defines product and service taxability. Some states plan to use sales volume or transaction activity to determine nexus.
Not every state immediately responded to the Wayfair decision, but every state will eventually act to define their policies through legislative, regulatory or policy action. Since the Supreme Court's Wayfair decision last June, over 30 states have introduced some type of economic nexus rule. As states determine their thresholds for economic sales nexus, manufacturers should begin implementing processes.
Six months after Wayfair, state tax administrators are still trying to read between the lines of the Supreme Court’s intention, as the Court did not provide details about minimum required standards. While some states are already enacting laws to collect sales tax, Congress may decide to regulate how they are doing so and impose limitations.
As the nexus landscape quickly evolves, manufacturers will need to determine which states they have created economic nexus with and whether their transactions in particular states would be subject to sales tax.
Goldin Peiser & Peiser can help you assess your tax liabilities for your manufacturing business. For more information, please contact Kevin Harris, CPA, at 214-365-2473. Learn more about the Manufacturing and Distribution Services Group at Goldin Peiser & Peiser.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.