CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Will New Internet Sales Tax Rules Require Companies to Qualify? South Dakota v. Wayfair (Part 2)

By: Ron Barrett, Bruce Gallo and Teri Mayor, COGENCY GLOBAL INC. on Thu, Nov 08, 2018

Fotolia_117332089_S-croppedAccording to the U.S. Census Bureau, estimated e-commerce sales hit $127.3 billion for the second quarter of 2018, an increase of nearly 4% over the previous quarter. (Total retail sales grew by 1.6 percent). With online sales taking over an ever larger piece of the retail revenue pie, new state sales tax precedent, as set by the Supreme Court’s decision in South Dakota v. Wayfair, Inc., is front of mind for many online sellers and state legislatures alike.

The Wayfair decision (as discussed in Part 1 of our series) has eliminated the prerequisite of a company having a physical presence to collect state sales tax, leading to landmark changes in compliance requirements for internet retail companies.

Since the Wayfair decision, many states are enforcing laws, which they had already had in place, or have passed new regulations regarding e-commerce or sales by remote entities. The rules in place are not intended to burden the small retailer operating on their own or through sites like eBay or Etsy, rather they are aimed at larger internet sellers with a significant amount of transactions in a given state. South Dakota’s threshold for requiring registration, collection and remittance of sales tax is at least $100,000 of gross revenue from taxable sales, or over 200 deliveries of these sales. Eighteen other states have imposed similar thresholds of $100,000 or 200 taxable transactions. A number of other states also have a threshold of 200 transactions but have placed a higher overall limit for gross revenue, such as $250,000 or $500,000.

There are only 12 states that have not yet enacted legislation requiring either collection of sales tax or notification to the purchaser after a certain threshold has been met. As of November 2018, those states include:

  • Arkansas
  • Arizona
  • California*
  • District of Columbia
  • Florida
  • Idaho
  • Kansas
  • Missouri
  • New Mexico
  • Nevada
  • New York
  • West Virginia
*California has drafted legislation that would place sales tax collection responsibility on remote sellers. It’s logical to assume that the states listed above will follow suit in the coming months or years.

Wayfair and ‘Foreign’ Entity Registration

The Wayfair decision is certainly impacting companies regarding the need to register to collect sales tax but it may extend even further --- requiring sellers to qualify or register as a foreign entity to do business in a given state.

Fotolia_173531756_XSTraditionally, determining whether a company needs to register to do business as a foreign corporation or LLC is often a complicated question — and one best fielded by an attorney.  Analyzing a company’s activities in the given state is key to making this determination.

There has been little case law so far on the question of whether selling over the internet establishes the requirement to qualify the company, and it remains unknown whether the Wayfair decision will change how courts view the situation.

Assuming there is no physical presence in the state, the following factors (among others) would need to be analyzed:

  • Employees within the state.
  • The company’s specific activities and their frequency within the state.
  • State statutory requirements.
  • Contracts within the state.
  • Assets held in the state.

Through this analysis, it can be determined whether the company’s activities rise to the level of “doing business”, requiring the filing of an Application for Authority or similar document to register or qualify in the state. This is not a decision to make lightly, as registered entities will often need to appoint a registered agent, become liable for franchise or other business taxes, and usually face annual reporting requirements to maintain good standing.

The Wayfair decision will strongly impact this decision in states that require an entity to be registered or qualified to do business as a foreign entity before registering for a sales tax permit. The states imposing such requirements on remote sellers currently include:

  • Alabama
  • Colorado
  • Indiana
  • Kentucky
  • Utah
  • Vermont
Remote sellers in these states can expect additional compliance obligations due to the Wayfair decision. On the bright side, the actual process for qualifying a corporation or LLC in these states is fairly straightforward, as shown in the table below.

State

Entity Type

Supporting Documents

Original Signature Needed?

State Fee

Expedite Fee and Turnaround Time

Special Requirements

Ongoing Reporting Requirements

Alabama

Corporations, LLCs

Corporations: Certified copy of charter documents from domestic state, certified within the last 6 months.

 

LLCs: No supporting documents required.

No

$150

$100, up to 3 business days.

A Certificate of Name Reservation must be obtained prior to filing the Application for Registration with the Alabama Secretary of State. You should file a Name Reservation Certificate online and submit to the Alabama Secretary of State, along with the other required qualification documents. The online name reservation fee is $28.

Initial Reports due 2 months and 15 days after file date.

 

Corporation Annual Reports due 3 1/2 months after FYE
(C corps).

 

LLC Annual Reports due 2 1/2 months after FYE (filing PPT).

Colorado

Corporations, LLCs

No supporting documents required.

No

$100

No expedited services online.

Must be filed online.

Report due annually by last day of 2nd month following the filing month.

Indiana

Corporations, LLCs

Certificate of Good Standing or Existence from home state, no more than 60 days old.

No

$125

No expedited service, walked-in applications processed within 24 hours.

 

Biennial Report due last day of anniversary month.

Kentucky

Corporations, LLCs

No supporting documents required.

No

$90

No expedited service,
walked-in applications processed within 24 hours.

One of the exact or conformed copies shall be filed with and recorded by the county clerk of the county in which the registered office of the limited liability company is situated. The estimated recording fee is $10.

Annual Report due June 30th.

Utah

Corporations, LLCs

Certificate of Good Standing or Existence from home state, no more than 90 days old.

No

$70

$75, up to 48 hours.

 

Annual Report due last day of anniversary month.

Vermont

Corporations, LLCs

Certificate of Good Standing or Existence from home state, no more than 30 days old.

Yes

$125

No expedited service available.

 

Corporation Annual Reports due 2 1/2 months after FYE.

 

LLC Annual Reports due 3 months after FYE.

Sales tax information from https://www.taxconnex.com/economic-nexus.

In addition to these requirements, and the need to register to collect sales tax and file sales tax returns, companies may also need to file and pay franchise, income or property taxes in the state. We recommend consulting with an accountant regarding those obligations.

The changes the internet has made to our lives in the last 20 years or so have been profound and ongoing. It should come as no surprise that the law is catching up to these changes and working to address some of the implications of e-commerce on our society. It does mean that companies must not only keep abreast of changes in technology and their markets, but also the forthcoming changes in regulations and laws, especially registration and reporting requirements.

The bottom line is that the Wayfair decision will give larger internet retail companies a new set of requirements to manage, alongside the other demands of their business.

In our next South Dakota v. Wayfair installment, we will look at the decision’s potential impact on charitable organizations eligible to make tax exempt purchases and sales in numerous states.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal or tax advice.

Topics: Company Formation and Filing Considerations