Will New Internet Sales Tax Rules Require Companies to Qualify? South Dakota v. Wayfair (Part 2)

According to the U.S. Census Bureau, estimated e-commerce sales hit $127.3 billion for the second quarter of 2018, an increase of nearly 4% over the previous quarter. (Total retail sales grew by 1.6 percent). With online sales taking over an ever larger piece of the retail revenue pie, new state sales tax precedent, as set by the Supreme Court’s decision in South Dakota v. Wayfair, Inc., is front of mind for many online sellers and state legislatures alike.

The Wayfair decision (as discussed in Part 1 of our series) has eliminated the prerequisite of a company having a physical presence to collect state sales tax, leading to landmark changes in compliance requirements for internet retail companies.

Since the Wayfair decision, many states are enforcing laws, which they had already had in place, or have passed new regulations regarding e-commerce or sales by remote entities. The rules in place are not intended to burden the small retailer operating on their own or through sites like eBay or Etsy, rather they are aimed at larger internet sellers with a significant amount of transactions in a given state. South Dakota’s threshold for requiring registration, collection and remittance of sales tax is at least $100,000 of gross revenue from taxable sales, or over 200 deliveries of these sales. Eighteen other states have imposed similar thresholds of $100,000 or 200 taxable transactions. A number of other states also have a threshold of 200 transactions but have placed a higher overall limit for gross revenue, such as $250,000 or $500,000.

There are only 12 states that have not yet enacted legislation requiring either collection of sales tax or notification to the purchaser after a certain threshold has been met. As of November 2018, those states include:

Wayfair and ‘Foreign’ Entity Registration

The Wayfair decision is certainly impacting companies regarding the need to register to collect sales tax but it may extend even further --- requiring sellers to qualify or register as a foreign entity to do business in a given state.

Traditionally, determining whether a company needs to register to do business as a foreign corporation or LLC is often a complicated question — and one best fielded by an attorney.  Analyzing a company’s activities in the given state is key to making this determination.

There has been little case law so far on the question of whether selling over the internet establishes the requirement to qualify the company, and it remains unknown whether the Wayfair decision will change how courts view the situation.

Assuming there is no physical presence in the state, the following factors (among others) would need to be analyzed:

• Employees within the state.
• The company’s specific activities and their frequency within the state.
• State statutory requirements.
• Contracts within the state.
• Assets held in the state.

Through this analysis, it can be determined whether the company’s activities rise to the level of “doing business”, requiring the filing of an Application for Authority or similar document to register or qualify in the state. This is not a decision to make lightly, as registered entities will often need to appoint a registered agent, become liable for franchise or other business taxes, and usually face annual reporting requirements to maintain good standing.

The Wayfair decision will strongly impact this decision in states that require an entity to be registered or qualified to do business as a foreign entity before registering for a sales tax permit. The states imposing such requirements on remote sellers currently include:

In addition to these requirements, and the need to register to collect sales tax and file sales tax returns, companies may also need to file and pay franchise, income or property taxes in the state. We recommend consulting with an accountant regarding those obligations.

The changes the internet has made to our lives in the last 20 years or so have been profound and ongoing. It should come as no surprise that the law is catching up to these changes and working to address some of the implications of e-commerce on our society. It does mean that companies must not only keep abreast of changes in technology and their markets, but also the forthcoming changes in regulations and laws, especially registration and reporting requirements.

The bottom line is that the Wayfair decision will give larger internet retail companies a new set of requirements to manage, alongside the other demands of their business.

In our next South Dakota v. Wayfair installment, we will look at the decision’s potential impact on charitable organizations eligible to make tax exempt purchases and sales in numerous states.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal or tax advice.