In June, the U.S. Supreme Court overturned its own previous decision governing sales tax and online retailers. The decision, handed down in the now famous – or infamous, depending on what kind of business you operate – Wayfair v. South Dakota case, gave states the ability to collect sales tax from online retailers, even if they don’t have a physical presence in that state.
The Wayfair ruling did not set a federal precedent for how states should collect sales tax, or even that they’re required to do so. Some do not. Without any federal precedent, in the future online retailers could be subject to the thousands of different tax laws governing states, counties, and municipalities where they sell goods. If you sell goods online, don’t panic yet. It will take most states weeks and perhaps months to establish rules for online tax. Read on for more details.
Wayfair v. South Dakota: The Ruling That Changed Online Sales Tax
The Supreme Court heard the case in April 2018, wherein South Dakota cited an annual loss of $48-$58 million in tax revenue due to a previous Supreme Court ruling that barred states from requiring online retailers to collect and remit sales tax. The case referenced, Quill Corp. v. North Dakota, decided in 1992 that states could not force online retailers to collect state or local sales tax from online sales when the retailer lacked a physical presence in the state.
That decision was made years before online shopping became so popular, and some argue that the loophole it permitted allowed online retail giants like Amazon to grow without the same tax liability as brick-and-mortar businesses. Supporters of the Wayfair ruling say that eliminating this loophole will permit physical stores to compete better with online sales from retailers who operate in different states.
Further complicating the lack of federal mandate was the oft-unenforced state law requiring consumers to independently report and pay a use tax on items they bought online. Most taxpayers either do not report a use tax at all, or vastly under-report it. Compliance is difficult to enforce, at best.
When the Supreme Court handed down its ruling in June, it noted that the eroding sales tax base and lack of use tax compliance were key factors in its decision.
What Can Online Retailers Expect Now?
To some large online retailers, the Wayfair ruling impact will range from nothing at all to a nuisance. Many of these large companies already have systems in place to collect and report sales tax, and the resources of in-house tax staff and external advisors. The effect will be felt more from small and mid-size online retailers. For them, the cost of compliance is a huge concern. It’s estimated that there are more than 10,000 different state, county, and local tax laws in the U.S.
However, that doesn’t mean that all those thousands of jurisdictions are ready to collect sales tax immediately, or what compliance will look like. In South Dakota, for example, there is a $100,000 sales threshold or 200 in-state transaction minimum before laws requiring retailers to collect sales tax become effective. Because South Dakota already had measures in place, they can begin to require retailers to collect sales tax in a matter of weeks. Other states would first need to take up the issue in the state legislature before online retailers would see any change.
In the meantime, online retailers with multi-state sales should compile a list of where they do business, how many dollars per state, and how many transactions per state. Then, for states where retailers don’t currently collect sales tax, it’s a good idea to see how aggressive those states’ tax collection policies are. It may be worth exploring the option of pulling out of online sales in certain tax-aggressive states, if that strategy makes sense for the long-term growth and business plan.
Also note that tax laws vary greatly. If your business has scattered sales across any given state, it’s unlikely this ruling would require you to collect sales tax for those minimal transactions. There are also some states, like Pennsylvania, where some local laws prohibit the municipality from taxing remote sellers.
What the Wayfair ruling did not decide is whether states can collect sales tax retroactively. Since online sales tax will remain a state-by-state issue, it remains to be seen what the actual impact will be, and when new laws will get passed.
For the most updated information, stay in touch with your tax advisor and monitor the legislative developments in the states where you do a significant amount of online sales. Questions about multi-state tax law can be directed to our Tax Department.