Examining Ohio’s Response to Wayfair : Considerations for Nexus and Sales and Use Tax Requirements

The Ohio Department of Taxation recently issued a very limited response to the SCOTUS’ decision in South Dakota vs. Wayfair, Inc. et. al. 

While the Department is not explicitly acknowledging a change in its policy following Wayfair, Ohio’s existing rule allows Ohio to assert that a remote seller has nexus for sales tax purposes, when a remote seller has greater than $500,000 in Ohio sales.  In its statement, Ohio indicated that it expects some remote sellers will begin to voluntarily collect and remit sales tax, which may be indicative of Ohio’s future policy intentions.

Out-of-State Sellers

Remote sellers of products and services into Ohio should begin to review their Ohio sales tax collection practices.

Ohio Customers

To the extent an Ohio customer is not being invoiced sales tax from a remote seller, that Ohio customer may be liable for use tax on its purchases. It is expected that Ohio and many other states will become increasingly aggressive in this area and thus special attention should be given to this matter.

Department’s Comments / Ohio’s Rule

The Ohio Department of Taxation commented:

“… [Wayfair] does not have an immediate, direct impact on Ohio. The Court ruled on the laws in another state; not on Ohio’s tax laws. We anticipate that we’ll see some out-of-state retailers begin to [voluntarily] charge and collect Ohio sales tax, but otherwise the sales tax rules and laws in Ohio will stay the same until the General Assembly decides whether or not to change them.”

Ohio currently employs a “substantial nexus” standard for determining if a remote seller of products/services is required to collect and remit sales tax in Ohio.  Ohio’s rule under Ohio Rev. Code Ann. § 5741.01(I)(1) states:

“Substantial nexus with this state” means that the seller has sufficient contact with this state, in accordance with Section 8 of Article I of the Constitution of the United States [Commerce Clause], to allow the state to require the seller to collect and remit use tax on sales of tangible personal property or services made to consumers in this state.”

Ohio also has a bright-line provision under § 5741.01(I)(2)(h) that deems substantial nexus to exist when a seller of products or services:

“Uses in-state software to sell or lease taxable tangible personal property or services to consumers, provided the seller has gross receipts in excess of [$500,000] in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state.”

Ohio’s determination of substantial nexus is thus clearly linked to the Commerce Clause of the US constitution and prevailing interpretations thereof.  Moreover, a $500,000 bright-line test establishes Ohio’s authority to assert nexus on remote sellers meeting that test, which is now especially relevant given the SCOTUS’ decision in Wayfair.  In Wayfair, the SCOTUS effectively eliminated the physical presence requirement for sales tax and apparently validated South Dakota’s economic nexus rule based on $100,000 more in sales or 200 transactions.

We will keep you informed as Ohio continues to issue guidance in this area.

Please contact a member of Barnes Dennig’s State and Local Tax practice if you’d like to discuss the impact to your business.