Auto dealerships have been following the sales tax laws based on the physical presence test for more than 25 years. This historically meant dealerships were only responsible to collect and remit sales tax in the state in which they had a physical presence. As a result of the U.S. Supreme Court decision on June 21, 2018, in South Dakota v. Wayfair, Inc. et al to overturn the Quill Corp. v. North Dakota (504 U.S. 298 (1992)), remote sellers may be required to collect and remit sales tax to states in which they do business — even if they do not have a physical presence.
This change will result in the need to potentially collect and remit sales tax to all states and local municipalities where physical and remote sales are conducted, if physically present in the state or when certain thresholds are exceeded and economic nexus is deemed to exist. For example, a taxpayer with remote sales into South Dakota totaling more than $100,000 or 200 separate transactions in a year is considered to have economic nexus and is required to collect and remit sales tax on retail sales. Any dealer trade or other wholesale sales are still exempt however, it is imperative the dealership maintain exemption certificates on file for these type of sales. Each state is taking its own approach on how to implement this new ruling and have adopted varying standards. To date, more than 39 states have announced they will enforce economic nexus, some with effective dates that have already passed. (See Baker Tilly’s multistate economic nexus chart for standards and effective dates.)
Now is the time for dealers with out-of-state sales to begin assessing their physical and economic nexus footprint, comparing their previously existing footprint and applying the new nexus guidance. Many dealerships already have multistate physical presence due to dealership locations and/or vehicle leases with out-of-state residents. Economic nexus could exist if dealership has revenue from an online parts store. Please note, while outside the scope of this article, it is unclear, how the states will apply economic nexus standards to dealerships selling vehicles to residents of other states. For example, if a Wisconsin dealership sells a vehicle to a Minnesota resident that takes possession of the vehicle and immediately drives it to Minnesota; will Minnesota consider this sale when applying economic nexus standards to the Wisconsin dealership?
New state registrations resulting from the Wayfair ruling should be carefully considered. Especially if dealership has physical nexus not previously addressed. Prior sales tax exposure may exist. Additional state registrations may mean adding staff to your team to 1) track and monitor each states filing requirement and when economic nexus thresholds have been met or exceeded, 2) collect and remit the appropriate sales tax to each state and 3) ensure collection and maintenance of exemption certificates. The addition of software modules to properly assess tax and apply jurisdictional rates may be necessary. If a dealer’s resources are not equipped to handle the additional compliance, outsourcing those tasks may be a consideration.
Dealerships should further assess whether any nexus existed previously under the physical presence requirement. Entering into a voluntary disclosure agreement or amnesty program with a state may be needed if a dealer has exposure for previously uncollected tax.
There are still a number of unanswered questions. Dealers are advised to consult their tax advisors to discuss how Wayfair impacts them.
For more information on this topic, or to learn how Baker Tilly dealership specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.