How Does the Wayfair Decision Affect You?

On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair, overturning earlier precedents striking the decades-old “physical presence” requirement for sales and use tax nexus. Previously, states could only require catalog and internet sellers to collect sales and use taxes on sales into a state if the seller had a physical presence in the state.  For example, a retailer such as Target was required to collect Iowa sales and use taxes on online sales to Iowans because Target operates a number of retail locations in Iowa, while an online retailer with no stores, offices, or sales persons in Iowa was not required to collect sales and use tax on sales to Iowans. 

The Wayfair decision replaces the physical presence test with an “economic nexus” test.  Specifically, the case considered a South Dakota law that imposes sales tax collection obligations on certain out-of-state sellers, based on the dollar amount ($100,000) or volume of sales (200 separate transactions) into the state. Last legislative session, Iowa passed a similar law, so the impact of the Wayfair decision will be felt in Iowa.

While the Wayfair decision has been described by many as being a tax increase, it really is not a tax increase at all. Nonetheless, the decision will result in significant additional revenue for the state because tax will now be collected by retailers on transactions that often escaped taxation previously. The online or catalog sales in question have always been subject to Iowa sales and use tax.  Iowans who purchase goods from out of state retailers for delivery and use in Iowa are supposed to pay tax on those purchases – either by paying tax to the retailer at the time of purchase, or by filing an Iowa use tax return reporting the tax due. Many purchasers do not pay use tax on such purchases – mainly because most are not aware of the obligation to do so.  Now, however, when you order a product on-line or over the phone, many more retailers will be required to collect tax, and most of us will start paying the tax we have always owed but rarely paid. Keep in mind, however, that even under Wayfair not all retailers will have sufficient economic nexus with Iowa to allow the state to impose a tax collection obligation on the retailer.  In such cases, you, as the purchaser of a taxable product, will still have the obligation to file a use tax return in order to pay tax on the purchase.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- Ronald Mountsier