South Dakota Defeats North Dakota: Ends Physical Presence/Sales Tax Nexus Debate

Following up on our theme this week of getting physical (see Physical Fitness Facility Sales Tax Post), we turn our attention today to physical presence or the fact that states no longer need physical presence to require companies to collect sales tax for out-of-state sales of tangible personal property. This is what the United States Supreme Court ruled in Wayfair v. South Dakota, so now remote sellers of tangible personal property need to take a step back and determine whether anything needs to be change in their sales tax compliance program based on this new reality that remote sellers of goods will be required to collect sales tax in states where they merely have an economic presence.

I say it that way because the Court's decision impacts not only online retailers but also a much broader group of retailers - anyone who is selling goods and delivering those goods to an out of state location and not currently collecting sales tax on those transactions. We have conferred with many businesses that ship goods to other states and do not collect Tennessee or another states tax, but those companies are not the traditional online retailer that Wayfair is. Regardless, the results of the Court's decision apply equally to all remote sellers, so all sellers of tangible personal property should take this opportunity to do an internal sales tax compliance assessment based on the outcome in Wayfair.


While our focus at Carter Shelton is Tennessee sales tax (and we address some preliminary thoughts on what Tennessee will do below), this is a multistate issue for taxpayers, and Tennessee is only one of the states that a company should be thinking about as they consider what is next for their sales tax compliance. We are coordinating with professionals across the country to evaluate this issue from a multistate perspective, and what we are seeing is that there is not a one-size-fits-all response to this. While Wayfair provides a framework, there are different sales thresholds in the states and each states substantive laws could be different as well depending on what is being sold. The implementation of a compliance plan will require a thoughtful analysis of a taxpayer's business as well as consideration of technology solutions to collect and remit the tax.

Because the sales thresholds vary depending on the state, the first analysis that a seller needs to do is determine the amount of sales that are shipped to remote destinations. For any state where sales exceeds $100,000 (some states are lower, but for now $100,000 should be a businesses' focus), the business needs to put those states on a list of states that they need to determine what obligation they have to comply. The questions that should be considered for each of the identified states includes:

Does the state have a statutory (or regulatory) requirement for sales tax collection?
What is the sales threshold in the state?
Are the goods be sold taxable in this state? 
Is there a risk that the state will apply its requirements retroactively?
Did my company have physical presence nexus even before the Wayfair decision?

The coming months will likely be a constantly changing framework of state reactions to Wayfair but businesses need to begin doing their own internal analysis to determine and quantify the sales tax exposure and begin developing a plan to mitigate that exposure. Once businesses have a good understanding of their situation, they will be prepared to make decisions as state tax authorities begin publishing guidance on the future of sales tax compliance across the country. In fact, some states are already establishing deadlines to begin sales tax collection as early as October. Do not wait! Instead, be proactive about preparing your company for the coming changes  in multistate sales tax compliance. 


We are in Tennessee, so we would be remiss if we do not mention that things are still in flux in Tennessee. Tennessee had previously promulgated a regulation (Rule 129) with questionable statutory authority for the regulation. The American Catalog Marketers Association and Netchoice filed litigation challenging the regulation, and the case is being held in abeyance. In addition, the legislature put the brakes on the enforcement of the regulation, pending the outcome in Wayfair, so Tennessee must wait for the General Assembly to reconvene in January before it will have clear guidance on the future of remote sales tax collection in Tennessee (baring a special session in an election year with the Governor term-limited, which is very unlikely). Despite Tennessee's current holding pattern, we expect the legislature to quickly take this issue up in January/February of 2019 to pass economic nexus legislation and corresponding tax cuts. This will be complicated by the fact that there will be a new Governor and potentially a new Commissioner of Revenue, so everyone needs to buckle up because it could be an interesting ride even though the result will certainly be some legislation that requires remote sellers to collect Tennessee's hefty 9.5% sales tax. Stay tuned!

The attorneys at Carter Shelton will continue to monitor the Tennessee and multistate developments involving sales tax nexus and provide updates as they become available. Please do not hesitate to contact us if you have any questions.