In order to understand the importance of the impact of the South Dakota v. Wayfair ruling on dealers and their dealerships we should first discuss the landscape prior to the ruling.
Quill v. North Dakota
Quill v. North Dakota was a United States Supreme Court (“SCOTUS”) case ruled on May 26, 1992, which affirmed a 1967 case that clearly established the state and local tax law of the land. Quill did not have a physical location in North Dakota, operated without employees in North Dakota, and did not store inventory in North Dakota. Quill sold office equipment into North Dakota by using marketing tactics such as catalogs and direct mail advertising. North Dakota argued that Quill had established a physical presence due to discs holding their software provided to North Dakota customers. The SCOTUS concluded that a business whose contacts with the foreign state are by mail only, lack the physical presence required to have the obligation to charge, collect and remit sales taxes.
South Dakota v. Wayfair
South Dakota v. Wayfair was a SCOTUS case ruling that overturned Quill v. North Dakota on June 21, 2018. In 2016, South Dakota passed a bill requiring out-of-state retailers to collect sales taxes for the state. When several large retailers failed to comply, including Wayfair, Inc., South Dakota filed a lawsuit. According to the SCOTUS opinion, “Given changes in technology and consumer sophistication, it was unwise to delay any longer reconsideration of the SCOTUS regarding Quill.” South Dakota does not have an income tax, therefore it relies upon sales taxes for revenue.
The SCOTUS ruled in favor of South Dakota in the highly anticipated case. The SCOTUS concluded that the physical presence sales tax nexus rule last articulated by the SCOTUS in Quill is “unsound and incorrect.” A real game-changer for dealers doing business with customers from other states.
The Billion Dollar Question: Do I Now Have to Charge, Collect and Remit Sales Tax?
Sales tax nexus is no longer solely based on the overruled Quill physical presence standard of 1992. Out-of-state sellers that meet minimum standards may be required to charge, collect and remit sales tax. In South Dakota, those minimum standards are either $100,000 in sales or 200+ transactions over a 12 month period.
As a result of the SCOTUS ruling, states may pass laws identical to South Dakota’s to change their current definition of physical presence nexus, and therefore, creating a sales tax obligation for out-of-state retailers. As a matter of fact, North Dakota enacted new legislation the same afternoon that the SCOTUS ruled on South Dakota v. Wayfair in order to begin collecting additional sales tax revenue as soon as possible. Many other states have already enacted economic nexus standards, which does not require the aforementioned overruled Quill definition physical presence for sales tax nexus, and is simply a numeric threshold of sales revenue. We expect the remaining states to quickly follow their lead.
HBK CPAs & Consultants Commentary
Dealerships are potentially facing steep costs should new legislation be passed in a state or states where they do business without a physical location. In addition to 47 of the 50 states that impose a sales tax, many states permit counties and municipalities to impose additional sales taxes. There are hundreds, if not more than a thousand, different taxing jurisdictions that a dealer may encounter. Dealers will need to hire someone to ensure compliance with the rules relating to these various taxing jurisdictions. Dealerships will likely need to reprogram their computer systems in order to collect the proper amount of tax. We anticipate that the annual cost of compliance alone (not considering the increased state and local taxes, fees, etc.) could easily exceed $50,000 for a dealer.
South Dakota does not have a state income tax; accordingly, the SCOTUS ruling is specific to sales tax. However, most other states impose a state income tax and it is reasonable to expect that dealerships will now be filing income tax returns in these other states. Dealers will most likely also be incurring fees related to registering to do business in these other states, paying gross receipts or franchise taxes in these other states, etc. Again, increasing the dealer’s cost of doing business.
Some dealers are supportive of the ruling. Their thoughts seem to be that their local brick and mortar business will now be able to compete with online retail giants. States and municipalities stand to gain billions of dollars in lost annual revenue, which is a giant victory for infrastructure and public school funding alike.
We know that the coming months will prove to be very busy and confusing due to the South Dakota v. Wayfair ruling. Because of the magnitude of the revenues being missed by the various states, we have been advising you to prepare for this exact SCOTUS decision for years now. Dealers should begin changing their processes to ensure compliance with each jurisdiction; as, significant penalties and interest are possible for non-compliance.
For additional information, tune into our FREE webinar July 19, 2018 at 11:00am EST.
Rex Collins is a Principal at HBK CPAs & Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at firstname.lastname@example.org; or by phone at 317-504-7900.
Shane Finn directs HBK CPAs & Consultants State and Local Tax Practice (“SALT”) with special emphasis on the impact of SALT on dealerships. Shane can be reached by email at email@example.com; or by phone at 215-628-8080.