The U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair affects many businesses, including manufacturers, that buy or sell products across state lines. It upheld South Dakota’s “economic nexus” statute that requires certain out-of-state sellers to register for and collect sales tax in the state, even if they lack a physical presence there.
Is your business affected?
Generally, a state’s constitutional power to impose tax obligations on businesses extends to those that have a substantial nexus, or connection, with the state. Previously, establishing a sales tax nexus required a physical presence — such as retail stores, manufacturing or distribution facilities, employees or sales representatives — in the state. But post-Wayfair, virtual or economic contacts are sufficient to establish nexus.
The Wayfair decision potentially affects any business that sells its products or services in a state, regardless of how orders are placed. It does not automatically require sales tax collections on all sales. But you will need to research whether the states where you do business have enacted economic nexus statutes and whether your activities meet the applicable thresholds.
The Supreme Court did not create a bright-line test for the level of activity required to establish sales tax nexus. It simply concluded that the threshold set by South Dakota’s statute — $100,000 in gross sales or 200 transactions — passed constitutional muster.
After Wayfair, most states have enacted economic nexus statutes that apply similar thresholds. But there are variations from state to state that might trip you up if you operate in multiple states that collect sales tax.
What about exempt sales?
Typically, sales taxes are imposed only on retail sales. Products intended for resale are generally exempt from sales tax. Many states also exempt products sold for use or consumption in a manufacturing process. Some manufacturers sell products at retail, but it is also common for their sales to qualify for a resale or manufacturing exemption.
Just because your sales are exempt, it does not necessarily mean you are off the hook. Some states’ nexus thresholds are based on gross sales (rather than taxable sales). In these states, you may be required to register as a sales tax vendor. If your sales are exempt, you will have to file a sales tax return showing zero liability and maintain documentation showing your eligibility for the exemption.
Does Wayfair affect purchases?
The answer to this question depends on your situation. If you purchase equipment or materials from out-of-state sellers, and your state has enacted an economic nexus statute, those sellers may begin collecting sales tax from you.
If your purchases qualify for a manufacturing or resale exemption, you won’t be charged sales tax. But to qualify, you will need to present sellers with an exemption certificate.
Can registration trigger other taxes?
You may be subject to income or franchise taxes in states where you do business. However, those taxes are governed by a different set of nexus rules.
Wayfair does not directly affect your liability for income or franchise taxes. Unfortunately, registration as a sales tax vendor might prompt a state to send you a nexus questionnaire for those taxes, potentially exposing you to additional tax risks.
In today’s digital marketplace, evaluating your sales tax obligations can be a complicated, time-consuming task. If you are feeling overwhelmed, contact a financial professional to help weigh the cost of compliance against the benefits of continuing to do business in the states where you have economic nexus.
For more information, contact Brandon Vahl at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.