Prior to Wayfair, states could only collect sales and use taxes from businesses with a physical location, employees or agent in the taxing state. In order for a state to require a business to collect and remit taxes, the business in question must have a substantial nexus with the state. Historically, a business only had substantial nexus with a state if it was physically located within that state or had employees or an agent operating there. This physical presence test has now been overruled by the Supreme Court’s decision in South Dakota v. Wayfair, allowing states to require out-of-state retailers to collect and remit state sales and use taxes for sales to in-state customers. The Court overturned its prior decisions in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois, which articulated the decades-old physical presence standard.
The Wayfair decision reflects significant developments that have occurred in the national economy. When the Court decided Quill in 1992, mail order sales totaled approximately $180 billion. Compare this to 2017 when online sales totaled $453.5 billion, or over $500 billion when combined with traditional remote sales. Under Quill, states were forced to rely on consumers to self-report their online purchases and personally remit the use taxes owed. However, consumer compliance rates have been estimated at around only 1-2% in states that implemented such systems, making this an unviable alternative.
South Dakota, the Wayfair plaintiff, complained that it was losing approximately $48 to $58 million a year from its inability to collect use taxes from out-of-state e-retailers (the nationwide total is somewhere between $8 and $33 billion annually). To combat this loss, South Dakota enacted a statute that required out-of-state sellers to collect and remit sales taxes if they conduct over $100,000 worth of business or engage in 200 or more separate transactions in South Dakota. Ultimately, the Supreme Court’s decision was limited to the constitutionality of the South Dakota Act, and, while the landscape of online retail has changed dramatically, the decision leaves a wake of uncertainty. What we do know is that the substantial nexus test can now be satisfied by sales to consumers in a state rather than only by physical presence of the business within that state. What we do not know is what minimum quantity of sales, either in terms of dollar volume or number of transactions, is enough to make the nexus sufficiently substantial. To further complicate the issue, states have wildly different population sizes, which makes it possible that the standard could vary from state to state.
On August 1, 2018, the Michigan Department of Treasury announced that beginning after September 30, 2018, it would require a remote seller to remit sales tax if it had sales exceeding $100,000—or 200 or more transactions—with Michigan purchasers during the previous calendar year. Sales tax responsibility for the remainder of 2018 under the new Wayfair nexus test is therefore based on 2017 Michigan sales activity. The Department indicated that it would waive failure to file and deficiency penalties for returns and payments due prior to December 31, 2018, so long as the taxpayer incurring those penalties has sales/use tax nexus solely due to the Wayfair “economic presence” nexus test. Interest on these taxes will not be waived. These requirements are described in the Department’s Revenue Administrative Bulletin 2018-16 entitled “Sales and Use Tax Nexus Standards for Remote Sellers.”
These changes have implications for automotive suppliers. While most suppliers’ customers typically qualify for a resale or industrial processing exemption, in the past many have not required customers to complete a Certificate of Exemption because they could fall back on the physical presence exemption under Quill. The Wayfair decision eliminates this fallback option and heightens the importance of maintaining clear records of applicable exemptions. Tennessee, Kentucky, Ohio and other states that have adopted the Streamlined Sales Tax System accept a uniform Exemption Certificate, a single form with exemption options for resale, industrial production and manufacturing and more (Form F0003, available at www.streamlinedsalestax.org). Other states, such as Illinois and Wisconsin, require their own Exemption Certificates.
Any automotive supplier selling to an out-of-state purchaser should check the exemptions available in the purchaser’s home state. Suppliers claiming exemptions should document the exemption and get the purchaser’s certification. A purchaser’s certification should place the responsibility on the purchaser rather than the seller to repay the tax, penalty and interest in the event the state later finds the exemption to be invalid. If the seller does not get the purchaser’s certification the presumption is that the transaction is taxable, whether or not the transaction qualified for an exemption. Going forward some states may enact statutes with de minimis sales exemptions like South Dakota, but until then the most prudent practice will be to have out-of-state purchasers certify any claimed exemptions.
