Last summer, the Supreme Court paved the way for individual states to collect sales tax on online transactions from out-of-state sellers. South Dakota v. Wayfair Inc. drastically changed e-commerce rules, and small businesses are starting to feel the effects. At the time of the Supreme Court decision, only South Dakota and a few other states had systems in place to collect sales tax from out-of-state sellers. Now, most other states have implemented or are beginning to implement their own legislation for e-commerce.
The crux of South Dakota v. Wayfair Inc. was that businesses no longer needed a physical presence to be subjected to local sales tax. Economic nexus, or having a certain volume of sales in a given state, applies regardless of where the seller is located. And each state has different regulations, making compliance difficult for some small businesses.
The Result of South Dakota v. Wayfair Inc.
There are more than 12,000 different tax jurisdictions across the U.S. This includes flat state-wide online sales tax, local sales tax, and county- and city-specific sales taxes. A few states, including South Dakota, Maine, Wyoming, Tennessee, and Massachusetts, already had thresholds in place prior to last summer. A handful of other states, like Maryland, North Carolina, Pennsylvania and others followed suit in the months immediately following South Dakota v. Wayfair Inc. This summer and fall, remaining states including Oklahoma and Texas join the majority of their peers in establishing tax laws for e-commerce.
Each state has enacted its own thresholds for sales tax compliance. For example, Maryland considers a business to have an economic nexus if they have $100,000 of sales or 200 transactions. Pennsylvania’s threshold is $10,000, and other states have a more generous cap of $500,000 – these states include Ohio and Texas, among others. As you can see, it’s a wide range.
The complicated part of online sales tax compliance is that some states, like Maryland, assess a flat rate across the board, while other states like Virginia calculate sales tax based on the city or county where the customer lives. Using the State of Virginia as an example, the sales tax rate in most locations is 5.3 percent, except for Hampton Roads, Northern Virginia, and the Historic Triangle, which are taxed at six, six, and seven percent, respectively. Note, though, that even if a state does not currently have tax laws establishing economic nexus, that doesn’t necessarily mean it’s okay not to pay the requisite sales tax.
Compliance with New State-by-State E-Commerce Rules
Even if you’ve been doing business in a state for years, with the new e-commerce rules, you must now register as an out-of-state seller. Each state’s process looks a little different; some have online forms, some require a fee to complete the form, and some require an annual permit fee to continue selling in that state. You must still register and file with a state even if the sales are nontaxable and the tax liability is zero.
Although South Dakota v. Wayfair Inc. gave states the option to add a new revenue source, which is a good thing for local governments, compliance is complicated and tricky for a lot of out-of-state sellers. We recommend taking the following steps to stay on top of changing legislation.
- Keep detailed records of where you do business
- Register with each state according to their rules
- Stay organized and keep track of each state’s tax rules and filing dates
- Collect sales tax on each transaction, separately stated and added to the sales price
- Report correct sales tax collection numbers, and double-check to ensure accuracy
- File with each state or local jurisdiction, even if you didn’t collect taxes
If your online sales in any state exceed the threshold for out-of-state sellers, you’ll need either an upgraded tax software system or a CPA knowledgeable about state and local tax laws, or ideally both. Managing the range of tax rates is complicated and complex, and failure to comply with local tax laws can result in unintended fines and penalties. Contact Naden/Lean’s tax team for questions.