On June 21, 2018, the Supreme Court overturned the Quill Corp. v. North Dakota physical-presence standard in favor of an economic standard impacting businesses’ requirement to collect sales tax any of the states.  Previously, a state could only require a business to collect sales tax if the business had a physical presence such as an office, distribution center, or sales representative working in a specific state.  However, because of the expansion of online retailers, the physical presence of a company no longer fairly applies sales tax collection across all companies and it has resulted in an overall reduction in states’ sales tax revenues.  The negative side-effects of the physical presence standard led the Supreme Court to finally rejected the physical presence test. Due to the new economic test, many online retailers, who previously would have been considered to not have a physical presence in a state, now are considered to have a presence in the state and are thus non-compliant with many states’ sales tax laws based on its sales activities to customers in the state.  Further, states are actively changing their sales taxes laws to accommodate the new economic test, making their reach broader and thereby increasing the number of companies who are non-compliant.  Being noncompliant with state sales tax laws can add major financial burdens to a business if audited by one state but could be detrimental if audited by multiple states as the economic consequences can be significant.

Every business should consult corporate counsel to assist them in evaluation where their customers are located based on the economic test.  Further, businesses need to know the sales tax laws of all their customer’s locations.  However, just because a business has a customer in a state, does not automatically mean the business is required to collect sales tax in that state.  For example, the Supreme Court, in deciding to uphold South Dakota’s economic test, approved a safe harbor within the law that did not require a business to collect sales tax in the state unless the company has delivered more than $100,000.00 wirth of goods or services into the state or engaged in at least two hundred (200) separate transactions for the delivery of goods or services into the state annually.  Many other states have adopted certain threshold requirements a business must meet before required to pay sales tax in that state.  Illinois, specifically, adopted the same threshold requirement as South Dakota.  Ultimately, the burden of accounting for state sales tax is daunting, and in order to achieve assured compliance businesses should seek the assistance of corporate counsel.  Although this will be an adjustment moving forward, many states will not force business to pay for sales tax retroactively based on the new economic test.  Instead, many states are requiring businesses compliance moving forward.

The new economic nexus standard will strongly impact most companies, particularly, those who conduct business online.  Online retailers must be vigilant in ensuring compliance with all sales tax laws.  There are several ways for businesses to pay sales tax to the necessary states based on business activity.  First, a business should note that five (5) states do not collect sales tax.  These states are Alaska, Delaware, Montana, New Hampshire, and Oregon. Second, twenty-four (24) states have joined an agreement called the Streamlined Sales and Use Tax Agreement (“SSUTA”).  Under the SSUTA, a member state provides a business with free tax software through certified service providers, whom, if used, will cause the businesses to be compliant with the state sales tax law and thus, immune from audit liability.  For the business who operate in the states that have adopted the SSUTA, it should be less of a burden to comply with the state tax laws because of the free software, and free services providers provided.

Companies will struggle most with compliance in the states that collect sales tax but are not members of the SSUTA.  Further, Illinois, notably, is included among the five (5) most significant states, whose economies are the largest by GDP, that have not joined the SSUTA.  The other four (4) being California, Texas, New York, and Florida.  For these non-SSUTA states, it is more imperative that companies engage corporate counsel to assist them identify the most effective software to comply with the new sales tax standards.  The software works in the background of a company’s computer systems to calculate and collect sales tax automatically.  Different software options offer varying prices, for example, a flat monthly fee, low transaction-based percentage or sales-volume-based percentage for the sales tax software.  Because the software is the key to compliance, it is important to invest time and money into assuring the software use is adequate and functions correctly.

Because there are approximately 10,000.00 sales tax jurisdictions in the United States, the state sales tax laws potentially applicable to a company are vast, thus it is imperative that companies consult corporate counsel about potential exposure to sales tax audit and unpaid sales tax liability.  Further, companies need to have continuous knowledge on changing sales tax laws to maintain compliance.  If a business is non-compliant moving forward, a state can audit a business and require them to pay the last three (3) years’ worth of sales tax.  Further, many states add interest to the unpaid tax balance that could add up to between thirty (30%) percent and forty (40%) percent of the total amount owed to the state.  The consequences have a real economic impact and as such, companies should remain diligent and consult corporate counsel to develop a strategy for compliance and ensure that it is current on the latest tax laws effecting its operations.