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Remote Transactions – Changes to Sales Tax Due to Wayfair Case

The recent Supreme Court decision in South Dakota v. Wayfair, Inc. (June 21, 2018) has stirred a fair amount of chaos and confusion amongst states and business taxpayers. In short, the Supreme Court has decided to overturn the physical presence nexus requirement related to state and local sales or use taxes. The nexus requirement determines whether an out-of-state company selling products within a state – in which it does not have a physical presence – must collect sales or use tax on sales into the state. Companies that did not meet the physical presence requirement are deemed “remote sellers” having no requirement to collect sales or use tax in any state where the company did not have nexus.

What is the effect of overturning the nexus requirement?

First, without a nexus requirement, states would be able to impose the tax collecting responsibility on companies selling products remotely in the state. However, some argue that this may result in states enacting retroactive tax collection efforts on remote sellers – an initiative which would mostly impact small online retailers. Second, without a nexus requirement, the advantage of being an out-of-state remote seller would decrease – an element, which some argue will help to level the playing field between online retailers and brick and mortar stores.

Congress steps-in

In response to the Supreme Court decision, House lawmakers have introduced the appropriately named Online Sales Simplicity and Small Business Relief Act of 2018 (H.R. 6824, September 13, 2018). The bill aims to address concerns over the repeal of the nexus requirement and to proactively alleviate any adverse effects that may come from the Court’s decision. First, the bill would disallow the retroactive taxing of remote sales that took place before the Wayfair decision. Second, the bill would prevent the imposition of sales tax compliance obligations for sales occurring before January 1, 2019. Third, the bill would create a small business exemption for remote sellers with gross annual receipts of less than $10 million per year. Lastly, the bill encourages states to collaborate in developing an “interstate compact” that clearly defines minimum nexus requirements and simplifies the sales tax compliance procedures. Under the bill, the small business exemption would be lifted 30 days after Congress approves the state- developed interstate compact.

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