Facing Economic Nexus after Wayfair vs. South Dakota
In the aftermath of the Wayfair vs. South Dakota ruling, ecommerce businesses will be responsible for sales tax reporting and collection in states they sell to, regardless of physical presence. Let’s talk about economic nexus.
Ugh, why should I care about Wayfair vs. South Dakota?
Wayfair vs. South Dakota was a federal case heard by the Supreme Court of the United States in which SCOTUS ruled that it is within states’ constitutional rights to collect sales tax on out-of-state transactions carried out by online retailers. The 5-4 ruling dictated on June 21st, 2018 directly challenged and overturned the 1992 Quill vs. North Dakota case while simultaneously shifting the understanding of commerce clauses.
Until the June 21st SCOTUS ruling, nexus was historically determined by physical presence–but the age of ecommerce with its burst in online sales and technological advances outdated the 1992 decision ill-equipped to deal with the huge influx of internet sales. In light of the changes and advancements that occured in the 25 years since Quill, states began to lose out on what’s estimated to be more than 8 billion dollars a year in sales tax revenue. Widespread knowledge of massive revenue losses spurred states to call for a federal reevaluation of the outdated commerce clauses set in motion in 1992.
Courtesy of the Wayfair decision, states newly-unburdened by previous federal restrictions will now be responsible for making the choice to collect taxes on ecommerce sales and their subsequent policy formations regarding collection policies.
Sooooo… What is economic nexus?
The concept of sales tax nexus originates with the 1992 Quill vs. North Dakota Supreme Court ruling stating that retailers had to maintain a physical presence in a state before requiring that merchant to collect sales tax for that state. Living up to its canonical definition, nexus is a complex series of connections between local state definitions, nationwide interpretations of nexus, and regional obligations of a retailer in situational contexts. Different states have varying definitions of what constitutes economic nexus and “significant presence,” but is generally understood to include several factors such as owning or operating an office, warehouse, or commercial space, number of employees, and relying on third-party partner for shipping, inventory, or distribution.
Laws regarding economic nexus have an increased layer of complexity because of the fact that they are currently “unenforceable” on a federal level, but this small detail hasn’t faltered states’ pursuance of passing nexus regulations and requiring sales tax collection. Many have interpreted the implications of the Court’s seeming approval of nexus regulation as opening another avenue for states collect revenue from online retailers, remote-sellers, and third-party shipping partners.
Okay, but how does this affect my ecommerce business?
How does the Supreme Court’s overruling Quill (superseding the dormant Commerce Clause) affect the ecommerce ecosystem and the online retail industry? Simply put, Wayfair means that you are now liable for collecting sales on transactions and exchanges in a state, even though you do not have a physical presence or location in the region. As an ecommerce retailer, if your operations situate you as qualifying for a particular state’s definition of economic nexus, you will be required to report and collect sales tax within that state.
That said, it’s incredibly important for you to comply with specific state laws and requirements in all of your economic activities. For example, if you run an online shoe store based in Texas that markets, ships, and sells to customers in Indiana, it’s likely that you need to adhere to Indiana’s laws regarding sales tax documentation and collection.
Fine. What do I need to do moving forward?
If you determine that your business has economic nexus in a state, the first step is registering for a sales tax permit in that state so that you can start collecting sales from customers. Choosing to begin collecting sales tax in a state without the correct permits and documentation from that state can result in serious repercussions, as many state governments interpret this unauthorized collection as a criminal act! Obviously, you should try really hard to avoid this… and the best way to navigate through the complexities of economic nexus is to seek out subject-matter experts that specialize in tax solutions, especially if you’re involved in omnichannel selling.
The most imperative takeaway here is that, as an ecommerce merchant maintaining economic nexus in a state, you must collect sales from all customers and transactions in that state, regardless of physical presence. Sales tax management can be a complicated, intensive, and costly hamper on the normal operation of your business strategies; because your company is now liable for miscalculations and errors in reporting or collection, the most essential step forward is securing a comprehensive tax solution.
In addition to changing federal policies, each state creates its own regulations for virtual sales. At a micro-level, some states even allow individual cities and counties to create their own laws, thereby making you responsible for keeping up with the rules for thousands and thousands of varying jurisdictions… Sound a little unrealistic?
How do I choose the best tax solution for my nexus needs?
No merchant should attempt to address increasingly complex tax legislation internally or without the benefit of an applied technology to monitor the current tax laws, rates and responsibilities as they differ from state, county and city. Even on the neighborhood level, discrepancies in reporting or overall failure to comply with various states’ requirements can have severe ramifications legally and financially.
At Creatuity, it’s our mission to build the most efficient ecommerce sites possible to foster your business’ access to technological advances and economic success while pairing you with the best tax strategies and expert resources out there. If your business is already operating on a best-in-class ecommerce site through Magento, there are leading-edge, integrative sales tax compliance solutions available to you. As a qualified, Enterprise solution partner, we’re able to adeptly match you with the most effective, personalized tax solution for your needs to create a smooth period of implementation and configuration through one of our tax partners, such as Avalara.
Avalara is compliance solution company that offers a wealth of knowledge in all things tax-related: tax solution teams, products, solutions, partners, and informational resources. With a rising 20,000 customers and over 600 pre-built integrations, teams of tax experts at Avalara are capable of offering cloud-based, automated solutions to the challenges created by the Wayfair decision. You can also view their continuously updated handbook of state-by-state nexus interpretations and guide to understanding economic nexus for free.
The comprehensive strategies provided by groups of Avalara’s seasoned tax professionals, including a nexus analysis, center on a personalized survey of your company’s business and economic activities. Custom nexus analysis services consist of a detailed evaluation of these activities against current state and case-by-case nexus rules and guideline, and a subsequent identification of locations where your company has nexus obligations. At the end of this process, Avalara provides state-specific options to become sales tax compliant. In a world increasingly influenced by the rise of digital globalization and virtually imagined spaces, requiring a bound, physical location has ultimately become outdated. Find the best tax solution for your ecommerce site to avoid entanglement with the dreaded economic nexus.