How the Wayfair Case Has Changed the Sales Tax World
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
The Wayfair case ruling, which was passed by the Supreme Court on June 21, 2018, has affected sales tax collection and payment in the U.S. for two years now. During this time, many sellers have sought professional guidance on the changes they need to make when it comes to filing their tax returns. However, others have decided to wait for Congress to intervene before taking action.
But is it worth it to wait? According to Michael J. Fleming of Sales Tax and More, the answer is no. Based on Congress’s past actions, or lack thereof, any intervention could take a long time, and waiting would lead to penalties being imposed by relevant states. So how can you stay proactive and make the most of the situation?
In this episode, Michael J. Fleming, the founder of Sales Tax and More, is interviewed by his co-host Ellie Moffat about how the Wayfair case has impacted the sales tax world. Michael explains what the term "nexus" means, the possible ramifications of non-compliance to the ruling, and his thoughts on waiting for Congress to intervene. Stay tuned.
Here’s a glimpse of what you’ll learn:
The Wayfair case ruling and its earth-shattering ramifications for sellers
Michael defines the term “nexus"
Does the Wayfair case ruling mean that sellers don't have to worry about physical presence anymore?
Why you should stop waiting for Congress to act on the Wayfair case
How to get in touch with Michael J. Fleming and Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is of course sales tax. Today, Ellie Moffat is going to be interviewing me about how the Wayfair case has literally changed the sales tax world. But before we get into the interview, let's introduce you to Ellie.
[0:52] Ellie: Hey, Mike. Hey, everyone. It's really great to be here. I'm excited to talk about this with you today. So I'll do a quick introduction for Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of returns, registrations, consulting, research, and like our name states more. So if you have questions about our services, please reach out and ask. We'll give you plenty of ways to do that. You can also look at the information we have along with this podcast and you can reach out to us pretty easily so I'm gonna roll right into this, Mike. Most of us have heard about Wayfair you've probably heard many, many things about Wayfair over time. But Mike, what exactly are the ramifications of Wayfair?
[1:44] Mike: Well, they're huge Ellie. Very, very huge. Most people don't realize how earth-shattering how universe changing Wayfair actually was and it was a surprise to many of us in the industry. So what Wayfair actually did is overturn the two previous US Supreme Court cases that talked about physical presence. So prior to the Wayfair case, in order for a state to require you to collect its sales tax, you had to have some sort of link or connection with the state that we call nexus. And it had to have some sort of physical component to it. So we can all you know, argue over what exactly those physical components were, but there had to be some sort of physical component. Well, Wayfair comes along in South Dakota versus Wayfair, South Dakota said, You know what, we don't think that a physical presence should be required. So they passed, you know, a statute that basically said, if you have $100,000 of sales or just 200 transactions, if you're selling into our state, then that's enough of a connection, an economic presence in order for you to have to collect and remit our sales tax. And the Supreme Court actually agreed with them, which was a surprise to a lot of people out there, including myself. What they said was, you know what times haven't changed. You know, it's not that things have changed and we have this internet out there. We never should have introduced the concept of physical presence, to begin with. There's no constitutional basis for it. So we made a mistake. When we first talked about this back in National Bellas Hess in 1967. And again, in Quill in 1992. So, you know, yes, you don't need a physical presence anymore. And what that means is that now you know, sellers, you don't have to have any connection with a state other than just making sales into that state. And if those sales are over a certain dollar threshold, or they're over a certain transaction threshold, you can now have the responsibility, the requirement to collect and remit tax in that state. So companies that, you know, may have never had a chance or requirement to collect tax before are all of sudden finding out that they actually have a responsibility to maybe even collect everywhere.
[4:38] Ellie: I think that is a really big deal. And hopefully, hopefully you've heard something about that at some point, Mike, I think it would be really great if you explain the term “nexus.” I've even googled it at one point. It doesn't give you a great definition. So why don't you explain what the term nexus means?
[4:57] Mike: It's the shampoo I use to clean my hair.
[5:02]Ellie: That’s what it sounds like, haha.
[5:03] Mike: Nexus is, is really it's just a fancy word that means the link or connection. So it's the link or connection that must be present with the state before the state can require you to do anything, you know, like collect its sales tax or collect a seller's use tax or even pay an income tax or a franchise tax or consumers use tax, you have to have some sort of link or connection with the state before the state can require you to do that. So up until June 2st of 2018. You know, for sales tax, you had to have some sort of physical component of this link or connection. Income Tax, not so much. You know, you could always well… not always but going back to 1992, you could have just an economic connection for you. income tax, you know, before a state could require you to pay its income or franchise taxes, but for sales tax, you still have to have some sort of physical connection. You know, when we say physical connection, you know, maybe it's inventory in a state, maybe it's a salesperson in a state, maybe it's an office in a state. Maybe it's, you know, people performing services traveling into the state, maybe it's a third party. You know, third parties to Supreme Court cases say that third parties can actually create nexus for you, if they're helping you to establish or maintain a marketplace in those cases, when's the 1960s case it's called Scripto. And the other is 1987. Case and it's called Tyler Pipe in the language and Tyler Pipe is really important because what they said and Tyler Pipe is, you know, it doesn’t matter what you call someone doesn't matter you know how you pay him doesn't matter if they represent you exclusively or they represent lots of parties, doesn't matter if they do it on a full time or part-time. I'm paraphrasing here's the important part. What matters is they are helping you to establish or maintain a marketplace and if they are then that can be nexus creating so I'm off on a tangent here Ellie but this is all about nexus. So you know, all of these things can create some sort of link or connection with a state. We call this link or connection nexus and it's the link or connection that has to be present for the state to make you pay taxes or collect its taxes.
[7:49] Ellie: Thank you so much, Mike. I think that's really appreciated. And you know, we have an entire webinar dedicated to this, but I think it's a great thing for our audience to know. So does Wayfair mean that we don't have to worry about physical presence anymore?
[8:05] Mike: Unfortunately, not. And this is, you know, very misunderstood, you know, so much so that we have a full webinar just on this topic. But I think that physical presence matters more now than ever before. But so many people, I mean, you know, our salespeople get calls, and, you know, I, when I'm speaking to not only, you know, potential clients, existing clients, even CPAs and other accounting professionals, they are coming to me and they say, hey, I've got a client, and they're underneath the threshold. So this economic threshold, you know, we want to get them deregistered for sales tax, and I ask and sometimes, you know, if they're an existing client, I know but I asked, well, why don't you get registered in the first place? Oh, well, we had a, you know, a salesperson in the state. Well, is the salesperson And still there? Well, yeah, they're still there. But we're underneath the threshold so we don't have to worry about this physical presence anymore. No, unfortunately, this new economic nexus doesn't protect you from anything. As a matter of fact, physical presence is going to always trump an economic nexus. So physical beat economic. Economic nexus it's just one more way for a state can try to compel you to do what they want you to do which is collect or pay their taxes so does not protect you at all from physical nexus if you've got a physical nexus you know, the reason why I say this matters now more than ever, is because the states are gonna be going after people for economic nexus. And you know, that maybe two years old and no one wants to have to worry about paying back tax plus penalty and interest going back two years, some of this physical nexus like this, you know, most people never knew that third party. I mean, it's not common sense. How can a third party create this link or connection for me, but they can't and the states are going to be stumbling across this and you may have had those types of relationships for eight, ten, twelve, twenty years. So yeah, physical presence. Now more than ever, I think that we've got to realize what our nexus footprint, what our link or connection with the states looks like, and how long we have had it?
[10:41] Ellie: So Mike, Wayfair, is about two years old. And we are still hearing people say that they're waiting for Congress to do something or for another court case before they do before they act. Is this a good strategy?
[10:57] Mike: I don't think so at all. I mean, we all see How much Congress gets done very little. They can't agree on anything. They can't even agree on a lunch order. You know, I'm surprised that they, you know, in the past have been even naming post offices. I think they moved beyond that they can't even agree on names for post offices now. Some people have said, you know, we got to do nothing. Congress last four years, the last eight years, last 10 years, last 12 years. On some topics. It's been a do-nothing Congress forever. Let me give you an example. Back in 1959, there was a US Supreme Court case called Northwestern Cement. And what the US Supreme Court basically said is its open season on interstate commerce. I mean, you can tax a state. You mean you can tax a company pretty much any way that you want to, and the companies got all up in arms and got all crazy in Congress. You know, they called on the congressman and within seven months Congress moved very swiftly. They passed Public Law 86-272 or the interstate income act of 1959. Now, here's what… what it did is it really nullified the Supreme Court decision. But when they passed this, they said that nexus was so complicated, it was so complex, that this was only meant as a temporary solution, and that they had to form, you know, committees and do studies and, you know, figure out what the best solution going forward is for nexus. Now, here we are, what, 61 years later. And we still have this temporary solution in an antiquated, temporary solution. I mean, it's, you know, the world has changed since 1959. And if anything, nexus is a lot more complicated today than it was back in 1959 so if you're waiting for Congress to act, maybe your great-grandchildren might benefit from any action they take. But I just don't think that they can get it together if you know, history shows us that they just haven't done a lot. Now, The Supreme Court back in 1992 reminded Congress that they should do something about nexus, you know, in the Quill case. They said, we've done our part, we did a lot of deciding here, but you know, Supreme Court, this is up to you. And for the next 20 plus years, we got nothing out of Congress. So the Supreme Court finally stepped back in. And now Congress doesn't have to do anything. And I don't think that they are so if you're waiting for Congress, I just don't think it's going to happen. If you're waiting for another lawsuit. Those can take years and how many of you right now you know, have maybe six months in a state like Texas and California, actually, nowadays, it's close to eight months. But that's not a whole lot of exposure. I mean, if you're gonna wait until you have three, four, or five years worth of exposure in the state comes knocking on your door. And now you have no options because you're being reactive rather than proactive. I mean, every day that goes by your exposure is growing. So I don't think that waiting is the right idea here. I just don't think you're going to see any type of positive results by waiting.
[14:38] Ellie: Thank you so much, Mike, this has been a really great episode I think. Jam-packed with information do you want to tell everyone how they can get in touch with us?
[14:47] Mike: Sure, you know, our website. So one of the easiest ways it's www.salestaxandmore.com. Sales Tax and More is all spelled out. So it's salestaxandmore.com. There are ways to reach out to speak to one of our salespeople, there are ways to schedule consultations with me. There are lots of free resources on there and you know descriptions of our services, we can help you with returns, registrations, we can help you figure out where or if a lot of companies think I need to get registered everywhere. And after they do a consultation. They're pleasantly surprised to find out that because of their specific fact pattern, they only have a couple of states or maybe even no states. There's also the flip side of that where you may have to get registered almost everywhere. So the website is a great way to find us and then of course we have Ellie. Ellie is happy to field all of your questions and she can be reached at emoffat@salestaxandmore.com. We appreciate everyone taking the time. To listen in today and look forward to speaking again soon.
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