In June, the United States Supreme Court ruled on South Dakota v. Wayfair, a case with major implications for eCommerce. Briefly, the ruling permits states to now impose sales tax liability on businesses regardless of where the business is located.
At the time of the ruling, we wrote that the effects of this ruling on the direct-to-consumer (DtC) wine market would only come out in the future, as most states that permit DtC wine shipments already required the sellers to collect sales tax. DtC wine shippers would only face a change if the handful of states that did not condition getting a DtC license on being a sales tax collector acted on the Wayfair ruling.
Well, now, less than two months later, we can now say that the Wayfair ruling has begun to impact the DtC wine market.
In recent weeks Iowa and Minnesota have issued notices from their respective revenue agencies indicating that in the coming months they will require remote sellers to collect and remit sales tax on sales they make into the state. This is notable because currently Iowa and Minnesota are both among the handful of states that do not require DtC wine shippers to become sales tax collectors.
DtC wine shippers selling into Iowa and/or Minnesota should therefore be aware that come January 1, 2019, and October 1, 2018, respectively, their tax liability in these states may change.
In 2017, Minnesota passed a bill establishing a sales tax requirement on remote sellers. At the time, the bill was in direct violation of the physical presence nexus rules that used to be in effect. However, with the Wayfair ruling, these rules became enforceable.
As such, the Minnesota Department of Revenue (DOR) recently posted a basic notice for remote sellers on its website, but most people will likely find its FAQ more informative. The key things to know about Minnesota’s upcoming requirements for remote sellers are:
- Qualifying remote sellers will be required to register with the Minnesota DOR and begin collecting sales tax on their sales to the state by October 1, 2018.
- Minnesota has a state sales tax rate of 6.875%, with local municipalities able to impose up to an additional 1.5%.
- Minnesota is a “destination-based” tax jurisdiction, meaning tax is assessed at the location where the customer takes possession of the goods.
- There is a small seller exception, so these rules will only apply if you are a remote seller who during a 12-month period made 100 or more retail sales shipments to Minnesota, or made more than $100,000 in revenue on 10 or more retail sales shipments to Minnesota.
- These thresholds are based on all retail sales made to Minnesota customers, meaning distributions into the state for resale (such as to a wine wholesaler) will not count.
- Marketplace Providers (who provide an online environment for third-party sellers to make sales to customers, like eBay or Etsy) are required to collect and remit sales tax on behalf of their users. Remote sellers are personally responsible for collecting sales tax on sales made outside of such Marketplaces.
Iowa passed its remote seller nexus rules only in May, clearly anticipating a positive ruling from the Supreme Court. Well, things went their way, and the state is now gearing up for enforcing these rules. A notice from the Iowa DOR is available here. The key details for Iowa’s remote seller nexus are:
- Qualifying remote will be required to register with the Iowa DOR and begin collecting sales tax on their sales to the state by January 1, 2019.
- Iowa has a state sales tax rate of 6%, but municipalities can impose up to an additional 1%.
- Iowa is a “destination-based” tax jurisdiction, meaning tax is assessed at the location where the customer takes possession of the goods.
- There is a small seller exception, so these rules will only apply if you are a remote seller who during the current or previous calendar year makes:
- $100,000 or more in revenue from their sales to Iowa; or
- 200 or more separate sales transactions.
- Note: It is unverified at this time whether these threshold numbers only apply to retail sales, or if sales for resale may count. That the rules relate to “retailers” indicates that only retail sales should apply, but this is as yet unconfirmed by the state.
- Marketplace Providers again are obligated to collect and remit sales tax on behalf of their users.
And What Does This Mean For DtC Wine Shippers, Specifically?
It is very important to remember that these rules do not inherently apply to all DtC wine shippers. Wineries making DtC sales to these states should pay careful attention to the small seller exceptions; if you fall under these thresholds you will NOT be affected by these rule changes. ShipCompliant users who do meet the thresholds can at present find the necessary returns in their account, as soon as they become registered with the states DOR.
Indeed, many DtC wine shippers may be far from reaching the revenue thresholds in either state: according to our annual DtC report, in 2017 Iowa saw only $15 million in total DtC shipments; and Minnesota limits wineries to shipping only 2 cases per customer per year. This does not mean that no one will hit the revenue threshold, but it does indicate that the numbers of wineries who do could be limited.
However, there is still the separate sales thresholds that each state applies. Here, things are still a little hazy with the biggest open question being “what is a ‘separate sales transaction’”?
This matters because it’s not always clear when a transaction has happened. One-off sales may be clear, but what about club or subscription sales? Is there a transaction each time there’s a payment of money, or each time a package is shipped? Would a winery who charges each time it ships a wine club order be making more separate transactions than a winery who charges only once per year, even if they ship the same amount of wine at the same frequency.
And, while Minnesota’s rule seems to include only retail transactions, Iowa’s is less clear — it’s possible that a wineries sales to Iowa wholesalers for resale could be included in these thresholds. (Though we do want to caution, based on past experience it is unlikely that the state will take that position.)
Due to the uncertainty in some of these rules and how they may apply to the specific conditions of some wineries (for instance, large, corporate wine groups making many sales across many platforms will have to deal with the small-seller thresholds differently than a single-shop operation), it is highly recommended that you consult with counsel or accountants before registering as a sales tax collector in either Iowa or Minnesota.
The Background: What Exactly is Happening Here?
A key principle undergirds state regulations: a state should not be able to burden a person or business that does not have sufficient contact with the state (which makes sense, you don’t want Texas charging you for speeding in California). The shorthand phrase for this sufficient contact is called “nexus”, and for decades the standard for the nexus under which a state could require a business to collect sales tax was what is known as “physical presence” nexus, as set forth by the Supreme Court in the 1992 case, Quill v. North Dakota.
Ever since the Quill ruling, states have tried to stretch physical presence as much as possible. Over the years, more and more of the retail market has been diverted to “tax free” Internet sales, which lead states to stretch physical presence even more. (Internet sales are seen as “tax-free” because most online sellers sell into states other than the one(s) they have physical presence in, and therefore they are not obligated to collect sales tax — in such cases, the consumers were obligated to pay their states’ “use” tax, so they weren’t actually tax free). Eventually, the stretching became an outright effort to overturn Quill and physical presence nexus, all leading to the Wayfair decision.
Problematically, the Wayfair ruling did not actually set up a new standard for nexus, it instead merely erased the previous physical presence rules. So states now have a much more open field to play with when it comes to establishing tax requirements.
The new playing field permits states to require business who have no direct, physical connection to the state — “remote sellers” — to pay sales taxes on their sales into the state. DtC wine shippers, selling wine across state borders from, say their Napa-based winery to a resident in Des Moines, are remote sellers and so will be affected by these new rules as much as any other eCommerce business.
Positively, there is a common pattern for the new nexus rules that states are setting up, including protection for small-scale sellers, uniform reporting processes, and prohibiting retroactive tax collection. However, there are enough particularities that it makes sense to walk through each state individually.
(At Sovos, we have extensive expertise in all things sales tax. If you want a broader, non-DtC wine focused view of the Wayfair ruling, and its impact on eCommerce, we recommend you look at our blogs and webinars available here.)
In a way, DtC wine shippers are well positioned for this new post-Wayfair world of sales tax rules because they have been already dealing with these type of rules for years. Indeed, ShipCompliant by Sovos was founded in large part to help wineries with their interstate sales tax compliance, and it remains a key part of our platform today.
But that does not mean that DtC wine shippers are immune from the changes in state sales tax rules that are coming down the line. These notices from Iowa and Minnesota are proof of that. Going forward, the remaining states that currently do not require DtC wine shippers to collect sales tax, but could if they change their nexus requirements, are: Colorado, Florida, Missouri, and Nevada.
Similarly, there are states that do not require DtC wine shippers to collect local tax (like Texas), or those that impose a tax other than sales tax (like Kansas with its “Occupational Tax”). Depending on if, and how, they change their nexus rules, DtC wine shippers could be caught up in their novel tax schemes.
As tax policies change, and as states change their rules to reflect those policies, it is critical for businesses to stay ahead of the change. This often necessitates using tools designed to navigate the complicated regulatory systems.
ShipCompliant by Sovos is committed to providing the support that the DtC wine market needs to meet its regulatory needs, including by informing the market of important rule changes and maintaining a cutting-edge system designed to meet the evolving regulatory environment. We encourage you to follow this blog to get the information you need to stay compliant.