South Dakota v. Wayfair – Economic Nexus and Manufacturers’ Sales Tax Obligations
Seamus M. Donoghue
It has been more than three years since the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair. In that case, the Court held that a state may require out-of-state sellers to collect and remit sales tax even if they lack a physical presence in the state. Since then, nearly every state with a sales tax has enacted an “economic nexus” law that extends the reach of its sales tax collection obligations to sellers beyond its borders.
Although sales by manufacturers are often exempt from sales taxes, they cannot afford to ignore economic nexus laws in states where they do business. Even if their sales are exempt, these laws may create new compliance obligations and substantially increase administrative burdens with respect to sales taxes.
Related Read: Sales Tax After Wayfair: What Manufacturers Need to Know
How do economic nexus laws work?
Generally, economic nexus laws impose sales tax collection obligations on businesses that exceed a certain number or dollar amount of annual sales in the state. Many of these laws are similar to the South Dakota law upheld in Wayfair, which applies to sellers with more than $100,000 in annual sales or more than 200 separate annual transactions in the state. But there are significant differences from state to state. Annual sales thresholds in some states are as high as $250,000 or even $500,000 and annual transaction thresholds may be lower or higher than 200.
Some states do not apply a number-of-transactions threshold at all, reasoning that it could unfairly require small out-of-state sellers to collect sales taxes. For example, if a state’s economic nexus law applies to sellers with more than 200 annual transactions, a company that makes 250 sales annually of an item that sells for $3 would be subject to the law, even though its annual sales in the state are only $750. Other states require sellers to exceed both a sales threshold and a number-of-transactions threshold.
Related Read: Operating in Multiple States May Have State Tax Implications
What is the impact on manufacturers?
Manufacturers’ sales are often exempt from sales tax. That is because the tax is usually limited to retail sales, while manufacturers typically sell goods at wholesale or for use or consumption by other manufacturers. But that does not mean that economic nexus laws do not affect manufacturers. Many states’ nexus thresholds are based on both exempt and taxable sales. In this situation, a manufacturer whose sales in a state are primarily exempt can still be required to register in the state as a sales tax vendor, file sales tax returns in the state and maintain documentation of its sales’ exempt status.
Manufacturers may also be affected by their home states’ economic nexus laws. Why? Because if they purchase equipment or materials from out-of-state sellers that are subject to the law, those sellers may now be required to collect sales tax. If these purchases qualify for a manufacturing or resale exemption, the manufacturer will need to furnish the sellers with an exemption certificate to avoid the tax.
Time for a sales tax checkup
The sales tax landscape has changed dramatically following Wayfair. Given the explosion of economic nexus laws, consider conducting a sales tax audit to assess the impact of these laws on your company’s activities. This can help ensure that you remain in compliance with all applicable state tax requirements.
For more information, contact Seamus Donoghue at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.