By Krista Schipp, Director, CohnReznick
When most consumers think of Wayfair Inc (NYSE: W), it is in terms of furniture and home goods, but Wayfair has now made its way into the cannabis sector. Wayfair refers to the U.S. Supreme Court case, South Dakota v. Wayfair, Inc., in which the court ruled that states may charge tax on purchases made from out-of-state sellers, even without the seller’s having a physical presence in the taxing state.
That decision attempts to reflect the modern economy, in which e-commerce is growing at a faster pace than traditional brick-and-mortar retail, and strives to level the playing field between remote sellers (e-commerce) and those with physical presences.
Since the cannabis industry operates exclusively within individual states and is prohibited from transacting across state lines, multistate tax-nexus issues have not to date been a primary concern. However, passage of the 2018 Farm Bill and the subsequent explosion of hemp and cannabidiol (CBD) online sales nationwide, state sales tax issues have become much more complicated.
Prior to the Wayfair ruling, a state could not require a remote seller to collect and remit sales/use tax if the seller did not have a physical connection there. The physical connection standard requires a seller to have physical activities in a state (e.g., working employees, stored inventory, a working office, physical meetings, or delivering product in the seller’s owned or rented vehicles) before the seller can be burdened with a state’s sales/use tax registration, collection, or remittance obligations.
In Wayfair, the Supreme Court expanded the definition of an in-state nexus to include a “virtual presence.” Currently, 44 states have enacted economic nexus standards. Most of the rules are similar to South Dakota’s, requiring remote sellers to register and begin collecting sales/use taxes if their gross sales in the current or preceding year exceed $100,000 or the remote seller has 200-plus sales transactions delivered into the state during the current or preceding year.
State laws vary regarding what is included in the calculation of the threshold amount. Some states base the sales volume threshold on “gross sales”, while others use “taxable sales”. Further, some states include sales made through a marketplace facilitator and other states exclude such sales.
Currently, 35 states require the marketplace facilitator to collect and remit the sale/use tax, not the remote seller. Doing so does not necessarily relieve the remote seller from filing sales tax returns in the state.
Local jurisdictions are likewise enacting economic nexus rules. For example, San Francisco passed an ordinance to impose an additional gross receipts tax (i.e., business license tax), starting Jan. 1, 2021, on businesses with more than $500,000 in annual gross receipts from sales in the city.
Impact on CBD Retailers
CBD sellers should be cognizant of different state economic-nexus rules and how they apply to their specific business. They should:
- Track their sales revenue and the number of sales transactions in each state;
- Determine the taxability of each sale in each state;
- Determine who is responsible for collecting the sales/use tax; and
- Make sure that all the required exemption documents are in place if the sales are exempt from sales/use tax.
It is also critical that operators understand the difference between hemp-derived and cannabis-derived CBD, and work with regulatory attorneys to make sure that sales of any hemp derivatives qualify under the Farm Bill.
For more information on the impact of the Wayfair ruling, contact Krista Schipp, at CohnReznick State and Local Tax Services.
For more information, contact CohnReznick.com.