The U.S. Supreme Court’s landmark June 2018 decision in South Dakota v. Wayfair opened the door for states to impose sales tax collection obligations on out-of-state sellers without a physical presence in the state. While laws like the one upheld in Wayfair target online sellers, they affect all businesses, including restaurants, that sell their products or services — or purchase supplies or equipment — across state lines.
Virtual Presence is Enough
Under the U.S. constitution, a state’s taxing powers extend to activities that have a substantial “nexus” — or connection — with the state. For an out-of-state business, substantial nexus with a state generally exists when the business “avails itself of the substantial privilege of carrying on a business in that jurisdiction.” Previously, nexus required a substantial physical presence in the state, such as brick-and-mortar establishments, manufacturing or distribution facilities, sales representatives or employees. But in Wayfair, the Supreme Court recognized that in today’s modern economy, a business can have a substantial nexus with a state, even absent a physical presence, through “economic and virtual contacts.”
How Much is “Substantial”?
In Wayfair, the Supreme Court upheld South Dakota’s “economic nexus” law, which requires an out-of-state business to collect and remit South Dakota sales tax if, in the current or previous calendar year, the business has either:
- More than $100,000 in gross sales of products or services delivered into the state; or
- 200 or more separate transactions for the delivery of goods or services into the state.
The Court did not establish a bright-line test for the level of activity deemed substantial, but most states adopting economic nexus laws in the wake of Wayfair (around 30 as of this writing) have embraced South Dakota’s $100,000 in sales/200 transactions threshold.
What Should Restaurants Do Now?
Restaurants that do business in multiple states, whether they deliver meals across state lines or ship their food products across the country, should review their activities to ensure that they remain in compliance with changing sales tax obligations. Even if you do not have a physical presence in another state, you may now be required to collect and remit sales tax on food products you deliver or ship to other states. For each state in which you have sales:
- Determine whether the state has an economic nexus law;
- Determine whether your level of sales in the state is sufficient to trigger sales tax collection obligations; and
- If it is, consider registering in the state as a sales tax vendor.
It is also important to review each state’s rules to assess the taxability of your sales. For example, many states exempt certain food sales from sales tax (or tax them at a lower rate) or provide exemptions for sales to certain charities or not-for-profit organizations. You may need to collect exemption certificates from eligible customers in the state in order to avoid charging them sales tax.
Pay close attention to the effective or enforcement date of each state’s economic nexus law. If that date has already passed, find out whether the state has procedures for limiting your liability for past sales, such as a voluntary disclosure agreement.
Even if your business is strictly local, you may be affected by Wayfair if you purchase equipment or supplies from out-of-state sellers. If your state has adopted an economic nexus law, those sellers may begin collecting sales tax from you. If any of these items are eligible for a resale or other exemption, you will need to furnish exemption/resale certificates to the sellers. If you previously accrued taxes on out-of-state purchases for which no sales tax was collected, be sure to review your use tax practices to avoid double taxation.