About a month back, a landmark court ruling quietly changed the sales tax landscape for numerous online sellers and remote software business. According to the United States Supreme Court’s recent decision in South Dakota v. Wayfair, internet sellers can now be required to gather sales tax in states where they do not have a physical existence. In a strongly worded opinion, the Court’s ruling overturns 26 years of precedence, leaving business to question how, and to exactly what degree, this ruling impacts them.Historically, states might just mandate companies to gather and remit sales tax on sales made to states where the taxpayer had physical presence( commonly described as the Quill physical presence guideline). Typically, physical existence was denied as having staff members or a physical place, such as a workplace or warehouse, because state.However, recently, states started a project to override the physical presence requirement with a focus on online sellers. States started passing”financial nexus “laws, attempting to redefine or directly contradict the idea of physical existence. Specifically, these laws produce sales tax nexus based on specific transactional thresholds.Many regarded these efforts to tax out-of-state business as reminiscent of “tax without representation, “however the states had legitimate concerns. Under the physical existence requirement, business like Wayfair or Amazon had a pricing advantage compared to brick-and-mortar merchants. In a wider sense, innovation companies, such as SaaS providers, were significant contributors to lost sales tax profits– upwards of $33 billion each year.For Wayfair specifically, at concern was South Dakota’s financial nexus law, which needed companies to gather sales tax if it has at least$100,000 in sales or at least 200 deals with consumers in the state. In a 5-4 majority judgment, the Court overruled the Quill physical presence precedent and deemed South Dakota’s economic nexus as Constitutionally proper. The Court reasoned that the state’s law better shows today’s economy anddescribed physical existence guideline as”unsound and inaccurate.”Exactly what does this mean for innovation companies?Currently, 26 states have either passed or proposed a rule comparable or perhaps more aggressive than South Dakota’s economic nexus law– and that list is growing daily.Considering this new ruling, SaaS companies are especially
at risk of seeing a big tax problem. Due to their cloud availability, SaaS companies frequently have a broader array of sales by state; therefore, an elevated risk of extensive nexus. Second, the SaaS rates design usually
breaks out the contract into monthly transactions. The typical 200+transaction portion of these financial nexus laws are far simpler to meet under the SaaS rates design. Simply puts, rather than having to have 200 customers in a state, SaaS business might activate nexus with only 17 clients, maybe less, in case of other independently invoiced services.Furthermore, a commonly-held belief in the innovation community is the”service” portion of software-as-a-service means that sales tax has little to no significance. In combination with the Wayfair ruling, a growing number of states now need SaaS business to collect sales tax on invoices.Outside of an impending audit, a company’s exit strategy produces another impetus for business to additional assess the Wayfair impact. For example, when undergoing an acquisition, sales tax direct exposure is a frequent issue during due diligence; often needing sellers to put a portion of the purchase cost in a holdback escrow or, at times, cancelling the deal altogether.Companies should not take this judgment lightly. In no unpredictable terms, Wayfair is a landmark ruling for e-commerce, online or remote sellers, with far-reaching ramifications. Wayfair modifies the sales tax landscape, producing unpredictability for business at all stages.Brian Sengson is a tax lawyer accredited with the State Bar of Georgia and a Manager of Bennett Thrasher LLP’s State & Resident Tax practice.
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