Until recently, retail sellers of goods and services were not required to collect sales tax unless they had a physical presence in a state. Sellers that operated primarily from one location and offered goods and services via the Internet or other technological means thus had very limited sales tax collection obligations.
Those days are over. On June 21, 2018, in a decision that overruled over 50 years of precedent and abruptly changed the sales tax compliance obligations of sellers throughout the country, the U.S. Supreme Court decided in South Dakota v. Wayfair, Inc. that physical presence is no longer required for a State to impose a sales tax collection obligation on sellers. In a previous post, we explored the various approaches taxing authorities are taking to the sales taxation of streaming services, and noted the impact that the Wayfair decision may have on sellers of streaming services. The decision in Wayfair similarly impacts sellers offering goods and other services through the use of the Internet. In the wake of Wayfair, all sellers should be aware that they may incur sales tax liabilities if they fail to collect and remit sales tax in jurisdictions, even if they have no property or employees.
Limitations of the Wayfair Decision and Post-Wayfair Challenges
Nevertheless, Wayfair only answered the question of whether a physical presence is required under the U.S. Constitution for a jurisdiction to impose a sales tax collection obligation on a seller. The U.S. Supreme Court made it clear in Wayfair that the Constitution still requires a substantial nexus between the taxing jurisdiction and the business that it seeks to tax, as discussed in MoFo's Special Edition of State + Local Tax Insights. The State statute at issue in Wayfair, for example, only required sales tax to be collected if the seller sold more than $100,000 of goods or services into the State or engaged in 200 or more transactions for the sale of goods or services in the State. Sellers should be aware that jurisdictions currently have statutes with widely varying standards for when a seller will be subject to sales tax collection obligations.
Additionally, even if a jurisdiction may generally require a seller to collect sales tax, no sales tax may be collected on sales of goods or services that are not subject to sales tax under the jurisdiction's sales tax laws. Therefore, sellers must be familiar with the sales tax laws of every jurisdiction in which they have a general obligation to collect sales tax to ensure that they collect sales tax only on taxable sales. If a seller fails to collect and remit sales tax on a taxable transaction, the seller will be liable to the taxing authority. On the other hand, if a seller improperly collects and remits sales tax on a nontaxable transaction, the seller may be at risk of being sued by customers in a class action lawsuit.
Digital and Cloud-Based Goods and Services May (or May Not) Be Subject to Sales Tax
Historically, most jurisdictions imposed sales tax primarily upon sales of "tangible personal property" and only limited services. However, in recent years some jurisdictions have revised their sales tax laws, and other State and local revenue departments have interpreted existing sales tax laws, to impose sales tax on digital and cloud-based goods and services. For example, many jurisdictions now impose sales tax on sales of remote access software or software as a service (SaaS). Companies that have a physical presence in a small number of jurisdictions, but offer access to software to customers in many jurisdictions, may now find themselves subject to new sales tax collection obligations. Moreover, jurisdictions may impose tax on platforms as a service (PaaS), infrastructure as a service (IaaS), and many other cloud based services.
Further, some jurisdictions impose sales tax on so-called "information services." New York, for example, generally imposes a sales tax on services involving the provision of information that is created or generated from a common database or that is widely accessible. Similarly to sellers of SaaS, sellers of information services are susceptible to increased sales tax collection obligations following Wayfair, since the services may be provided electronically to a wide audience in many jurisdictions.
These are only a few examples of the types of digital and cloud-based goods and services that may be subject to sales tax. Any seller that makes remote sales of goods or services through the Internet should carefully analyze its sales tax collection obligations in a post-Wayfair world.
States, just like sellers, are adjusting to the changes brought on by the Supreme Court's decision in Wayfair, and this area of the law is rapidly evolving. While the responses to Wayfair from states and localities may vary, it is clear that sellers may no longer rely on a small physical footprint to minimize sales tax compliance obligations. Further, the removal of the physical presence requirement may embolden states and localities to apply sales tax laws to new industries, goods, and services. Therefore, sellers must continue to monitor this ever changing landscape.
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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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