For the last 26 years, physical presence nexus meant that auto suppliers only had to consider sales tax nexus in those jurisdictions where they had offices, inventory or employees. For many suppliers, this meant filing a handful of sales tax returns, even if sales were made into most (if not all) states.
But the Supreme Court’s recent Wayfair decision eliminated the sales and use tax physical presence requirement adopted in 1992 through the Quill v. North Dakota decision, long before the explosion of commerce on the internet. The ruling applies to all of the states and affects all remote sellers, not just internet-based sellers.
The Wayfair decision eliminated the physical presence standard, opening the door for “economic nexus” standards that require sales tax collection when certain activity thresholds are met. These thresholds may be a dollar amount or a transaction amount, depending on the state. Over 20 states have already addressed economic nexus. Automative suppliers may have a sales tax collection and compliance obligation in potentially hundreds of jurisdictions.
A significant increase in compliance obligations
Importantly, Wayfair has resulted in more questions and uncertainty, some of which will be resolved through continuing litigation of the case. However, auto suppliers that sell for resale or sell component parts for further processing are likely to see a significant increase in sales tax compliance obligations that will require additional time and expertise.
For example, maintaining proper exemption certificates becomes increasingly important to avoid unwarranted tax exposure. As a result of Wayfair, businesses will likely be required to be registered in more jurisdictions for sales tax purposes because they now have nexus in more jurisdictions. Obtaining the proper exemption certificates required for each particular jurisdiction is now an additional burden on businesses selling out of state.
Auto suppliers that sell at retail will now have numerous questions that need to be addressed in many states, such as:
- What are the correct state tax rates?
- What is taxable?
- Are local sales taxes also due?
- When should suppliers start charging and remitting taxes?
- Do suppliers need to update or obtain new sales tax software?
- How and when will the states respond to Wayfair?
Understanding how sales tax nexus may affect an auto supplier’s business is extremely important. How the states and Congress collectively respond will be seen in the coming weeks and months. What is certain is that the sales tax nexus landscape will be changing very quickly and auto suppliers need to prepare now.
