How sales tax nexus changes when you deliver across state lines

The tale of Oregon-based Mattress World, a delivery into neighboring Washington state, and uncollected sales tax has become legendary.* In the present sales tax environment, it’s become more relevant than ever.

As the story goes, some Washington state residents traveled south to Oregon in their quest to find just the right bed. They purchased the bed, sales tax-free, but needed help getting it home. Mattress World hired a third-party vendor to deliver and assemble the new bed set in the buyers’ Washington residence.

Unfortunately, Mattress World unwittingly created sales tax nexus with Washington through the use of the third-party vendor, which it paid for and arranged. When a business has nexus in a state, it’s required to register with the tax department and collect and remit sales tax.

At the time, sales tax nexus-creating activities were largely linked to physical presence, like having an office, store, or warehouse in a state. But unbeknownst to Mattress World, Washington had broadened the definition of physical presence to include third-party delivery services.

Had the Washington buyers retained the third-party delivery service themselves, the retailer wouldn’t have been legally required to collect and remit sales tax. Instead, and over time, Mattress World unknowingly racked up close to $2 million in unremitted sales tax, penalties, and interest charges. Though it collected and remitted Washington sales tax once it realized it had to, the years’ worth of unpaid taxes were too great a burden and the company was forced to close.

Sales tax legend as cautionary tale
A lot has happened since Mattress World shuttered in early 2012 — notably a June 2018 decision by the Supreme Court of the United States. In South Dakota v. Wayfair, Inc., the Supreme Court overruled the long-standing physical presence rule that prevented states from taxing most remote sales. It determined a business’s “economic and virtual contacts” with a state could be a sufficient basis for sales tax nexus.

After the Wayfair ruling, more than 30 states rushed to adopt economic nexus laws similar to South Dakota’s, which imposes a sales tax collection obligation on remote retailers with substantial economic activity in the state (more than $100,000 in sales or at least 200 separate transactions in the state in the current or preceding calendar year). More states will follow suit in 2019.

With so many states imposing new requirements on out-of-state businesses, there’s a high probability businesses will find themselves in a position similar to the erstwhile Mattress World: unwittingly establishing sales tax nexus in one or more states.

Some new requirements for remote sellers are laced with unclarity: The Supreme Court removed the physical presence rule without replacing it with a similar bright-line test. Thus New York has adopted economic nexus and is apparently enforcing it, along with existing provisions of its tax law, effective “immediately.” As of now, that’s the only effective date the state has provided.

Anyone doing business across state lines needs to be vigilant. Avalara’s state-by-state guide to sales tax nexus rules can help you determine your nexus risk in all 50 states, though it would be prudent to consult with a sales tax expert as well. If you discover you have a new sales tax obligation, it may be time to automate sales tax compliance.

*This example has even been used as a case study to stimulate discussion on tax law and burdens in an Economics 201 class at Reed College.