Wayfair, a game changer for cannabis
When you think of Wayfair, you might think of furniture and home goods, but Wayfair also has made its way into the cannabis sector. What’s the connection? 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 if the seller does not have a physical presence in the taxing state.
The Wayfair 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 presence in a state.
Because the cannabis industry operates exclusively within individual states and is prohibited from transacting across state lines, multistate tax nexus issues have not been a primary concern to date. However, with the passage of the 2018 Farm Bill and explosion of the hemp and cannabidiol (CBD) online sales across the country, state sales tax issues just became 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 with the state. This physical connection standard requires a seller to have physical activities in a state, such as 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, and remittance obligations.
In Wayfair, the Supreme Court expanded the definition of in-state nexus to include a “virtual presence.” Currently, 44 states have enacted economic nexus standards. Most states have enacted rules similar to South Dakota’s, requiring remote sellers to register and begin collecting sales/use tax 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 as to 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 (i.e., Amazon) and other states exclude these sales.
Currently, 35 states require the marketplace facilitator to collect and remit the sale/use tax, not the remote seller. This does not necessarily relieve the remote seller from filing sales tax returns in the state.
We are also beginning to see local jurisdictions enact economic nexus rules. For example, San Francisco passed an ordinance that will 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 the different state economic nexus rules and how they apply to their business. Sellers 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.
- Make sure 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 their 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, Director, National Tax - SALT
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.