As Wayfair turns 6, what’s happening with economic nexus? (part 1)

Six years ago this Friday, the U.S. Supreme Court decided, narrowly, to complicate life for online sellers.

In the landmark 2018 case South Dakota v. Wayfair, Inc. et al, the Court determined that an out-of-state seller could establish “nexus” through just economic activity. (Nexus is an economic presence that triggers the obligation to collect and remit tax or at least communicate with appropriate states.) Not to mention that eCommerce was set to skyrocket around the time of Wayfair, a lift-off later sent into hyperdrive by online shopping during the pandemic.

States were as eager in 2018 for more tax revenue as they have been since, and they soon set individual economic nexus triggers according to in-state sales, revenue or both ($250,000 per year in sales in a state, for example, or 200 or more separate transactions). Except not every state has used the same dollar figure or the same total of sales through the last six years. “Revenue” can also vary, meaning “gross revenue” in some states and “taxable receipts” or “retail receipts” in others.

Some states are also now easing nexus thresholds even as they try to levy sales taxes on new products and ramp up “sales taxes” in other forms.

But if states are so serious about sales tax, why don’t they just pick a number? What’s with all the thresholds? Why do sellers who’ve never set foot in a state have to collect and remit sales tax from customers there? Why isn’t there a national sales tax, anyway?

Why has this aspect of online business become so confusing since Wayfair – and when, if ever, is it going to get simpler?

More than physical presence

Companies have always been able to establish nexus with physical presence in a state: an office, reps or affiliates, warehoused inventory (more on this later) or just appearing at a trade show.

Wayfair was something new. Voting 5-4, the Supreme Court overturned its 1992 decision in Quill Corp. vs. North Dakota and decreed that physical presence in the internet age is no longer all that’s required to create nexus. The Court also reasoned that the South Dakota law regulating Wayfair did not burden retailers because only merchants doing a large annual business in the state had to collect and remit sales tax – reasoning that has recently been challenged, if not debunked, by national lawmakers and agencies.

“Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states,” the high court opinion read in Wayfair, a case that had been the fruition of a long effort by brick-and-mortar sellers to level the field with remote sellers. (In states like Alabama, as we’ll see, the effort continues.)

So to online companies benefiting from the U.S. eCommerce boom fell the burden of keeping up with jurisdictions’ requirements of economic nexus. And sellers have had to keep up since: All 45 states with a statewide sales tax have economic nexus.

The initial price tag

A recent report from the U.S. Government Accountability Office, “Remote Sales Tax: Federal Legislation Could Resolve Some Uncertainties and Improve Overall System,” says that some businesses “took an incremental, risk-based approach” when selecting which jurisdictions to register with first due to the cost of registering simultaneously in all required jurisdictions.

For some, the cost has been high. The GAO reported one business incurred $1,500 in monthly compliance costs to remit less than $500 in sales taxes. Some online sellers limited the states into which they sold or limited sales into some states. Some changed the types of products they sold to simplify compliance. Some, the report added, went out of business partially because of remote sales tax compliance.

“As long as the Wayfair ruling stands, the Congress ought to step in and give small businesses some relief,” Sen. Ron Wyden (D-OR), chair of the Committee on Finance, has said.

Automation has been a help in cutting compliance costs. Most recently, artificial intelligence has been touted as being able to interact with software and end users to streamline all phases of compliance. New tax-related data, including transactions and filing information, can help troubleshoot reconciliations, improve forecasts and head off problems that could eventually lead to a sales tax audit (if and when AI fulfills its current hype, that is.)

Clearer tax landscape?

Though the Streamlined Sales and Use Tax Agreement (SSUTA) – which pre-dates Wayfair and which many states now use – continues its efforts to simplify sales and use tax administration, the question persists amid a hodge-podge of state regs:

Will the U.S. ever join the rest of the world in having one national sales tax?

The question has come up in Congress regularly for 25 years and counting. One recent U.S. uniform sales proposal is The FairTax Act, which aimed to replace major sources of federal revenue such as income taxes, estate and gift taxes, capital gains, and payroll tax (and the entire IRS) with a 23% sales tax on retail sales of goods and services. The Act remains in committee – perhaps in part to the federal revenue having to take a big hit should FairTax ever pass and to abolishing the IRS being a partisan powder keg. No progress on a national American sales tax is expected soon.

That’s about all that hasn’t changed in sales tax since Wayfair. Next time we’ll look at cutting-edge products becoming subject to sales tax and at some changes that might, believe it or not, benefit online businesses.

Let TaxConnex manage the burden of keeping up with all the changes and challenges that come with staying compliant. Contact us to learn what it means when sales tax compliance is all on us.