On June 21, 2018, the US Supreme Court handed down a decision that will shape the future of internet sales tax. In South Dakota v. Wayfair et al., the court ruled that the state of South Dakota internet sales tax law should stand.
South Dakota’s court battle was to get Wayfair, an online furniture marketplace, as well as Overstock and Newegg, to pay sales taxes on orders the companies shipped to customers who live in the state. The retailers argued that, since they didn’t have a warehouse or employees in the state, existing case law meant they did not have to charge sales tax to South Dakotans.
This ruling doesn’t mean that you need to register and collect sales tax in all 50 states tomorrow, or maybe ever. In fact, this ruling just opens the latest round in a multi-year tussle, in courtrooms and statehouses, over internet sales tax. As states struggle to catch up to the ever-changing online retail environment, there will certainly be more battles ahead.
Quill and Nexus: The History of Internet Sales Tax
Nexus, for the purposes of internet sales tax, has meant a physical presence in a state sufficient to trigger an obligation to pay sales taxes. Your business always has sales tax nexus in the state where it’s based, as well as any additional states where your employees are based or where you have physical property, such as goods stored in a warehouse.
This definition of physical nexus came from a 1992 Supreme Court ruling that involved a mail order company, Quill Corp. v. North Dakota (which affirmed another ruling from 1967). This was six years before Google would even be founded. The court couldn’t envision a world in which a large (and growing) segment of the retail economy would involve pixels and delivery vans rather than malls and shopkeepers.
When brick-and-mortar stores sell to customers, sales tax is a given, since all parties are on the ground in a particular state (unless you are in one of the five states that don’t have sales taxes). When you ship an order to a customer, the question of whether internet sales tax applies has, until now, depending on whether you had nexus in the state where the customer lived, under the rules laid out by Quill.
Amazon has grown to be one of the biggest retailers in the US – and it may soon become number one. Online retail is predicted to account for 10 percent of all retail sales in 2018. The meteoric growth of internet sales has been propelled, at least in part, by a special discount only available to those buying online: no sales tax.
As online shopping has grown, however, several factors have led online retailers to add sales tax to more and more purchases. Amazon has warehouses (which equal sales tax nexus) just about everywhere. The internet retail giant went from a multi-year (losing) court battle with the State of New York over sales tax liability a decade ago to its announcement in 2017 that it would collect sales tax in the 45 US states that have one.
If an online shopping site doesn’t charge you sales tax, it doesn’t mean you don’t owe the tax. Consumers are supposed to pay use taxes on online purchases if sales tax is not collected by the sellers. It’s hard to get buyers to pay use tax, however. Despite efforts by states like Colorado to ramp up use tax compliance, collecting small amounts from hundreds of thousands of consumers isn’t economical for state revenue departments.
State governments, keenly aware of the millions of dollars lost in sales taxes from online sales, have scrambled to update their tax laws to force online sellers to charge and remit state sales tax. Two-thirds of the states that levy a sale tax have expanded their definition of nexus to include remote sales by retailers who don’t have a physical presence in the state. It’s no accident that South Dakota’s version of this law was the focus of the Wayfair lawsuit; the state has no state income tax, so it had an extra incentive to find a way to make up its lost sales tax revenue.
Consumers who live in the most populous states, including New York, California, Texas, and Florida, already pay sales tax on many online purchases, since major brands often have stores or warehouses in those states. This hasn’t put a damper on eCommerce sales in those states, as the Washington Post reported last year. The additional sales tax is unlikely to slow the inexorable growth of online retail.
For smaller online sellers, the biggest impact of the Wayfair decision is not the sales taxes you will have to add at checkout. The administrative costs to register and collect sales taxes in 45 states are a blip for big corporations like Walmart and Amazon, but this could be a difficult cost for smaller businesses to absorb.
Wayfair Translated, Plus Two Reasons Small Businesses Might Be Exempt in South Dakota and Beyond
Even after the Wayfair decision, you might not owe sales taxes on orders you ship to South Dakota residents. The law includes one exemption, with two potential factors. So long as neither of these factors are breached, some small businesses will be able to legally fly under South Dakota’s tax radar.
1. Sales Under $100,000
ECommerce sellers that ship less than $100,000 worth of products to South Dakota customers in a 12-month period are not subject to the law and don’t have to collect sales tax in the state. This will exempt many small eCommerce sellers, assuming that these same sellers do not exceed the second limitation:
2. Fewer Than 200 Orders Shipped
South Dakota ranks 46th in population with fewer than 900,000 residents, but shipping 200 orders a year is a low bar. This provision of the South Dakota law has the potential to snare many smaller retailers, even if their sales volume is below the $100,000 threshold. If you ship high volume, lower-priced items, this provision could trigger an obligation to collect South Dakota’s internet sales tax. In other words, even if you only sell 200 items to South Dakota residents at $5 a piece, your business would come in well under the $100K revenue threshold, but you’re still on the hook because you will have hit the 200 order threshold.
3 Things You Need to Know About Internet Sales Tax in 2018
Even if you shipped more than 200 orders to every state in the US last year, you might not see a big change in your internet sales tax obligations. The Wayfair decision doesn’t mean that you must immediately collect sales taxes on every order you ship.
In fact, the larger ramifications of this ruling for eCommerce businesses will probably take months or years to unfold. In the meantime, here are three reasons you don’t need to panic.
1. Wayfair is Not an Open Door to Universal Internet Sales Tax – Yet
The US Supreme Court ruling upheld the specifics South Dakota internet sales tax. The opinion is clear that the state won, in part, because it has taken steps to reduce the burden on internet businesses (see #2 below).
Two things are likely to happen in the near future:
- States will enact internet sales tax regulations in line with the Wayfair ruling.
- Another case could move through the courts to test the legality of a different state taxing scheme, perhaps one with lower annual sales thresholds or more complex regulations.
For more on your potential eCommerce sales tax liabilities, Nolo has a good online guide to state sales tax regulations.
2. The SSUTA is Your Friend
The biggest problem with online sales tax compliance is the patchwork of different tax rules across states, counties, cities, and sometimes even smaller taxing districts. Many states have different tax rates in different cities or counties. Some states base the tax rate on the location of the seller. Other states require sellers to charge sales tax based on the tax rate at the address to which an order is shipped – an even more complex puzzle.
The Streamlined Sales and Use Tax Agreement, or SSUTA, is an attempt to bring clarity and unity to the cacophony of state and local tax laws. Twenty-four states are full or associate members, which means that they have brought their tax regulations into compliance with the agreement. Although the map of state SSUTA participation shows that most of the big coastal states aren’t yet participating, all but Colorado have some level of participation in the organization.
SSUTA member states must accept tax payments through ACH, provide online filing, and also allow businesses to file their sales tax returns through a standardized simplified electronic return, accepted in all states.
South Dakota’s membership in the SSUTA was cited by the Supreme Court as justification for its conclusion that the state’s internet sales tax didn’t impose an undue burden on commerce. In light of this, more states may step up to full membership in the future.
While the SSUTA provides significant relief from the complexities of sales tax regulations, you still have to file and pay taxes to each state individually, and sales tax due dates can vary from state to state.
3. Managing Your Internet Sales Tax: There’s an App for That
Even with improvements such as the SSUTA, the landscape of internet sales taxes is complex. Fortunately, you don’t have to figure it out on your own. Apps such as TaxJar and Avalara specialize in helping small businesses understand and manage their sales tax liabilities. Accounting programs such as Quickbooks offer sales tax rate calculations and online filing assistance. You can also turn your sales tax filings over to a business tax professional.
A Legislative Solution Could Be on the Horizon
There is one more reason for eCommerce sites to take heart after Wayfair. For several years, legislative fixes for the internet sales tax loophole have been stalled in Congress. Some legislators may have felt their hands were tied by the nexus definition in Quill. Wayfair frees them to move these bills forward and also adds some urgency. Justice Roberts dissented from Wayfair because he felt the burden should be on Congress to change the laws on internet sales taxation.
The Marketplace Fairness Act, which has bounced around Congress for several years, is just one of several possible avenues for legislative action. The act would require states to either join the SSUTA or follow alternate guidelines to simplify their internet sales tax regulations.
How Fulfillment Can Help You Navigate Internet Sales Tax
If you think you don’t need to collect and remit sales taxes in a particular state and then you find out that you do, you won’t be able to go back to your customers to collect that money – it will come out of your pocket. It makes good business sense to get out in front of your internet sales tax obligations.
Your fulfillment provider can be a terrific asset in sales tax compliance. Through your 3PL company’s software, you can get alerts when you are nearing the dollar amounts or numbers of orders that would trigger tax obligations in each state. You can analyze the sales data collected by your fulfillment center for past years to find the states where you might need to register and collect sales taxes.
Collecting internet sales tax in multiple states is a big task for a small eCommerce business. Fortunately, you don’t have to do it alone.