WAYFAIR & YOU (SALES TAX AND THE NEW ECONOMIC NEXUS)
Not that long ago, if a business didn’t have a physical presence in a state, such as a retail store, and sold a product in that state, there probably was no obligation to collect and pay sales tax in that state. It was an easy way to determine how to collect sales tax and worked for decades. However, in the internet age with more and more online retailers having no storefronts and a drastic increase in internet sales, states concluded that they were losing millions of dollars in sales tax revenue. The internet allowed sales across both state and country lines without the need for a physical presence in a state and sales tax regulations faced a new reality.
In response, the Tennessee Department of Revenue promulgated “Rule 129[i]” to address out of state businesses selling to its residents. This required out of state dealers (also known as “remote sellers”) to register by March 1, 2017, and to start collecting and paying sales tax by July 1, 2017, if that retailer had more than $500,000 in sales of taxable personal property in Tennessee.[ii]
In 2016, like the State of Tennessee, the State of South Dakota introduced a similar bill related to remote seller sales tax.[iii] This bill resulted in a lawsuit between the State of South Dakota and the online retailer, Wayfair, Inc., regarding the collection and payment of sales tax based on Wayfair’s sales within South Dakota even though it did not have a physical presence in the state.[iv] Due to constitutionality concerns raised in the Wayfair case, the State of Tennessee delayed its implementation of now Rule 129(2) until such time as a decision was reached by the U. S. Supreme Court in the Wayfair case and the Tennessee General Assembly had a chance to review the same.[v] That time is now at hand, with the 111th Tennessee General Assembly having convened on January 8, 2019, and likely to react to the Wayfair decision.
As part of the U. S. Supreme Court’s discussion in the Wayfair decision, the Court noted that a reasonable degree of protection was provided to remote sellers due to the state’s adoption of the Streamlined Sales and Use Tax Agreement (SSUTA).[vi]
The State of Tennessee has also adopted the SSUTA and it is to be implemented July 1, 2019 (formerly to be implemented July 1, 2017, in conjunction with Rule 129(2)[vii]). It would be reasonable to adopt the SSUTA and Rule 129 at the same time to make sure that remote sellers have a smooth transition related to the payment of sales tax in Tennessee.
You might be thinking, “My business already pays sales tax in Tennessee, so I don’t need to worry about this.” However, the Wayfair decision has far-reaching implications. Many states that once required a physical presence are now using their own versions of the “economic nexus” test with varying requirements. A lot of states are following South Dakota’s lead, with 29 states, plus the District of Columbia, taxing remote sellers without a physical presence in their state. Another 10 states, including Tennessee and Virginia, are looking to implement laws or rules to do so in 2019.[viii] On January 30, 2019, S.B. 1083 passed the Virginia Senate to further that state’s implementation of an “economic nexus” test for sales taxation of remote sellers.[ix] Each state is different, with one state requiring as little as $10,000 in sales in their state, while others, like Tennessee, require up to $500,000 in sales. This area is evolving and could lead to several changes to the way business is done.[x]
During this time of transition, it is appropriate to review your business model and sales goals to see how the decision may create a ripple effect on your business and how you will need to prepare for this change in sales reporting and tax collection. Any business with sales in another state needs to know the sales tax reporting and collection thresholds for each state in which their products will be sold and, perhaps, stored. Possibly included are Amazon distribution warehouses that store products for sale.
The lawyers at Hunter, Smith & Davis are available to assist you with that review and to help you transition more efficiently and effectively.
[i] Rules and Regulations of the State of Tennessee, Section 1320-05-01-.129
[ii] Rules and Regulations of the State of Tennessee, Section 1320-05-01-.129(2) (January 1, 2017)
[iii] South Dakota Senate Bill No. 106
[iv] South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)
[v] Tennessee Department of Revenue Sales Tax Notice No. 17-12
[vi] South Dakota v. Wayfair, Inc.
[vii] Public Chapter 602 (2017) and Tennessee Department of Revenue Sales and Use Tax Notice No. 17-06
[viii] 2019 Outlook: States Still Responding to ‘Wayfair’ by Tripp Baltz, Bloomberg Tax (December 31, 2018)
[ix] Virginia’s Legislative Information System, Virginia Senate Bill 1083, http://lis.virginia.gov/cgi-bin/legp604.exe?191+sum+SB1083
[x] 2019 Outlook: States Still Responding to ‘Wayfair’ by Tripp Baltz, Bloomberg Tax (December 31, 2018)