United States Supreme Court Ruling and Its Impact on Illinois Dealers’ Sales and Use Tax Obligations
Following the recent United States Supreme Court’s seminal decision in South Dakota v. Wayfair, Inc., the circumstance of an Illinois motor vehicle dealer’s out-of-state sales and use tax obligations appears to be evolving. This ruling impacts retailers, large and small, including franchised dealers. In handing down its decision, the Court overruled prior judicial precedent in National Bellas Hess, Inc. v. Department of Revenue of Illinois, and Quill Corp. v. North Dakota, which previously held that a state could not require an out-of-state seller with no physical presence in that state to collect and remit sales taxes on goods the seller ships to customers in that state. Remarkably, the Wayfair Court ruled that states may assert nexus (physical presence) and require sellers with no physical presence in the state to collect and remit sales and use tax for goods sold within the state. Under this ruling, retailers may be subject to the local sales tax laws in states where they make sales of any tangible personal property across state lines, regardless of whether that retailer has any physical presence in that state.
In the Wayfair case, the State of South Dakota claimed to have annual multimillion dollar losses in sales and use tax revenues due to increasing internet transactions and out-of-state retailers doing business with South Dakota residents. To address this loss of revenue, South Dakota enacted a sales tax law requiring an out-of-state retailer with gross revenue derived from sales of tangible personal property in South Dakota of over $100,000, or 200 or more separate transactions, within 1 year, to collect and remit sales taxes in South Dakota.
In overturning the prior physical presence standard, the Wayfair Court did not prescribe a new standard for which a state could impose nexus on retailers. Accordingly, several states, including Illinois, have enacted or are considering enacting some form of the South Dakota law adopting a threshold for establishing nexus to collect sales and use taxes from out-of-state sellers. Retailers, including motor vehicle dealers who sell vehicles and parts to out-of-state residents – especially given the prevalence of internet sales – should consider instituting internal controls to gauge sales activity to determine the filing requirements and assess the need for registration in these other states that have enacted threshold nexus laws for collection of sales and use taxes.
For example, under the Wayfair decision, considerations arise for dealers whose sales activity in a particular state exceeds that state’s enacted gross revenue threshold based on a single or separate transaction(s) thereby establishing nexus. This may include both vehicles and parts sales, necessitating the monitoring of transactional amounts, for example, of such properties sold to customers in certain states where such nexus laws have been enacted. Dealers should also be wary that states which have enacted the nexus threshold may not differentiate between retail and wholesale sales to determine gross revenue or transactional activity in finding nexus exists. Dealers effecting the sale of vehicles or parts in other states to out-of-state residents should review with their attorneys or tax advisors their vehicle and parts sales (to other states) to assess their liability. The determination of nexus and filing obligations in a given state is separate from the determination of taxability. Importantly, establishing nexus may result in all out-of-state transactions of the sale of tangible personal property (vehicles and parts) into that state, subjecting the dealer to that state’s tax collection obligations.
Dealers should undertake review of the Wayfair ruling and its impact on vehicle and parts sales. For example, there are various ways a transaction takes form when a dealer sells a vehicle to a customer residing in another state. The differences between drive-away possession and dealer- or customer-arranged delivery of vehicles sold out-of-state to purchasers, may affect the applicability of threshold nexus requirements. Dealers who sell parts out-of-state should also evaluate other states’ threshold nexus laws to determine liability and consider instituting internal policies to closely tally total sales revenue of vehicle and parts as well as number of sales transactions to be able to know whether they exceed the nexus thresholds of a destination state. And in that instance, the dealer should assess further its obligations for registration and tax collection compliance in that state.
In summary, dealers should consult with experienced counsel or tax advisors who can assist in advising about newly enacted threshold nexus laws of other states for the collection of sales and use taxes. This will assist dealers with important determinations of registration and compliance, as well as, liability.