The Supreme Court made 2018 an incredibly exciting year for state and local taxes. For almost three decades, sales taxes from interstate commerce were controlled by one U.S. Supreme Court ruling: Quill v. North Dakota. In this case, the Court concluded that an out-of-state seller must have physical presence in a state before sales tax collection laws could be imposed. However, on June 21, 2018, that all changed. The U.S. Supreme Court overturned the Quill precedent when it ruled in South Dakota v. Wayfair that physical presence was no longer a requirement.
In this 5-4 vote, the Court sided with South Dakota’s law, which requires remote sellers to register, collect, and remit sales tax if the seller had a physical presence in the state, or if in the previous calendar year the seller had:
- Over $100,000 of gross revenue from the delivery of tangible personal property, products transferred electronically, or taxable services in South Dakota; or
- Sold these goods for delivery in South Dakota in 200 or more transactions
Since Wayfair, states have been busy. Now that physical presence is not the only requirement, states are looking for ways to impose their sales tax laws onto out-of-state entities. Many are tweaking their existing laws to establish “economic presence” thresholds similar to South Dakota’s in an effort to appropriately define when an out-of-state organization is subject to their state’s sales tax collection responsibilities. Others are simply adopting rules through the issuance of administrative guidance. In either case, organizations everywhere are facing a multitude of new and burdensome filing requirements.
What ‘Wayfair’ Means for Not-For-Profits
The bulk of the attention from the Supreme Court decision has been focused on online retailers like Wayfair. But it is important to note that the Wayfair case extends to all types of entities, including those in the nonprofit sector.
Not-for-profit organizations often have an exemption from sales tax when it comes to buying things for use in their not-for-profit’s mission. Most of the time that exemption does not extend to any services sold by the organization. If you’re an organization selling goods or services in a multistate context, such as through an online bookstore or gift shop, you may find yourself in a jurisdiction that has enacted a new economic presence threshold in the post-Wayfair world.
It will be important for not-for-profits that have multistate transactions to re-examine their sales tax compliance process to determine if their activities meet economic thresholds in the states where they are selling their services. If a not-for-profit meets a state’s threshold for the first time under a changed state sales tax requirement, the not-for-profit will need to register with the state, file a sales and use tax return, determine which transactions are taxable, and collect and remit sales tax on those transactions.
Analysis of sales tax requirements may not be simple. States are not uniformly adapting their sales tax requirements. Thresholds and effective dates vary by the jurisdiction. The following broad look at how some of the states have responded reveals the nuances in state sales tax approaches.
Trends in Sales Tax Changes
Several states including Colorado, Hawaii, and Illinois adopted sales tax changes that are substantially similar to South Dakota’s. Other states have taken a slightly different approach. Alabama, for example, implemented a higher threshold than South Dakota’s: retailers and marketplace facilitators must collect and remit sales tax when they have qualifying sales in excess of $250,000 with in-state customers. Georgia’s sales thresholds are also $250,000, or 200 or more retail sales with Georgia residents.
A few states have adopted a use tax notification requirement if sales are below the stated threshold for collection. For instance, in Washington, if an out-of-state organization makes sales into the state of at least $100,000 or 200 transactions in the current or prior year, the organization must collect and remit sales tax to Washington. However, if the organization has less than $100,000 or 200 transactions for purposes of collection but its sales exceed $10,000, the organization has a choice of either: registering and collecting the sales tax, or following certain use tax notice and reporting requirements. Pennsylvania also has a $10,000 registration or collection threshold that went into effect on April 1, 2018.
Prior to the Wayfair decision, Massachusetts had a law on its books that would require businesses that collect internet cookies from Massachusetts’ customers to collect and remit sales tax if the companies make more than $500,000 in internet sales and 100 or more transaction into Massachusetts. Massachusetts has indicated that it intends to apply its law retroactively to Oct. 1, 2017.
Rhode Island also had a law on the books for collecting sales and use tax from remote retailers (non-collecting retailers in the statute’s language). The statute took effect on July 15, 2017. Non-collecting retailers that make $100,000 or more in gross revenues from sales in state or conduct 200 or more transactions in the state in the previous calendar year must either collect and remit sales tax or provide notices to their in-state customers to alert them that they may owe sales or use taxes on the transaction. In July 2018, the Rhode Island Department of Revenue issued a frequently asked question (FAQ) document about the impact of the Wayfair decision on Rhode Island’s sales tax policies. Although it did not specifically mention the effective date, the FAQ document refers taxpayers to review the law to determine whether they would be subject to the registration requirement, and as referenced above, the effective date of the law is in 2017.
It’s also important to note that the vast majority of states’ thresholds reference “gross sales,” meaning that even transactions that are not typically subject to sales tax (i.e., sales for resale, or exempt transactions) will count toward the economic presence threshold. Accordingly, an organization that sells goods wholesale and also sells direct to consumer online may find its direct consumer sales, even where the direct to consumer sales do not exceed the established threshold amounts, are subject to a state’s sales tax requirements.
Even the states that implemented the South Dakota sales tax thresholds to the letter have different effective dates for their changes. Hawaii’s changes were effective immediately—July 1, 2018, while Illinois’s changes took effect Oct. 1, 2018 and Colorado’s on Dec. 1, 2018.
Although nearly half of the states had changes effective in 2018, a few have changes effective for the first time in 2019. Seven states, including Utah, had sales tax changes that took effect on Jan. 1, 2019. California has changes effective April 1, 2019. Pennsylvania’s $100,000 mandatory collection requirement comes into effect July 1, 2019. Some states have yet to make changes to their sales tax processes, including Florida, Kansas, and Missouri.
What’s Coming Next
We anticipate additional state activity around the sales tax issue in 2019, particularly among the states that adopted a wait-and-see-approach after the Wayfair ruling. Not-for-profits will need to work through the compliance ramifications of the sales tax law changes, including how to tackle the state registration process, which transactions are subject to tax, and how to ensure collections are both collected and remitted.
A tax advisor experienced with the multistate complexities that came out of the Wayfair decision can help ensure new and existing compliance requirements are met. For more information, please contact us.
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- Online Retailers Reeling as Supreme Court Overturns Quill in Landmark Sales Tax Ruling
Tarra Curran is a Leader of the State and Local Tax Practice in New England. She can be reached at firstname.lastname@example.org or 401.626.3240.
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