This summer, the U.S. Supreme Court made a decision that will likely have sweeping consequences on sales tax laws. In the case of South Dakota v. Wayfair, Inc., the Court removed the physical presence requirement for sales tax nexus.
What this means is that states can now force businesses to collect sales tax on goods and services sold in the state even if the business doesn’t have a physical presence in the state. The ruling will affect businesses that sell goods and services online, as well as via mail or telephone orders (MOTO).
The Court’s ruling in this case effectively overturns an earlier ruling that prohibited states from collecting tax on these kinds of sales. In 1992, the Court ruled in Quill Corp. v. North Dakota that states could only tax businesses that had one or more bricks-and-mortar locations in the state. Because this ruling came before the widespread adoption of e-commerce, it applied primarily to MOTO sales.
In South Dakota v. Wayfair, Inc., the Court acknowledged that “the Internet’s prevalence and power have changed the dynamics of the national economy.” For example, e-commerce retail sales topped $453 billion in 2017, the Court noted in its majority opinion. By comparison, mail-order sales in the U.S. were just $180 billion in 1992 when the Court ruled in Quill Corp. v. North Dakota.
In addition, the growth of e-commerce has increased revenue shortfalls faced by states seeking to collect sales and use taxes, the Court added. According to the Government Accountability Office, prohibitions against collecting sales tax on online purchases cost states more than $13 billion last year.
While consumers are technically required to pay all sales taxes that apply to online purchases when they file their state income tax return, few people actually do this.
Not New for Some States
It’s important to note that many states already collected online sales taxes of some kind before the ruling. And some state laws already have a nexus standard that allows them to tax to the maximum extent permitted under the U.S. Constitution. These states can now immediately collect sales taxes on MOTO and online sales under the new nexus standards.
As a result of the ruling, the 19 states that currently don’t levy online and MOTO sales taxes can now pass legislation requiring that sellers collect these taxes and remit them to state taxing authorities. States that already collect these sales taxes could revise their laws based on certain aspects of the ruling.
In South Dakota, there is a de minimus rule that applies to the collection and remittance of sales tax on out-of-state online and MOTO sales. Only businesses with more than $100,000 in sales or at least 200 transactions in a state must levy and remit sales taxes. It’s expected that most, if not all, states will establish a similar de minimus rule.
Impact of De Minimus Rules
De minimus rules could limit the impact of the court ruling on smaller businesses that don’t have a huge volume of online sales. This includes eBay and Etsy sellers that won’t have enough volume in any one state to be forced to collect and remit sales taxes.
Also, most large businesses like Amazon and Wal-Mart already collect sales taxes on online purchases. This is because they have a large enough physical presence in most states to meet the physical presence requirement for sales tax nexus. As a result, the biggest burden of the ruling could fall on mid-sized firms that have just enough out-of-state online and MOTO sales volume to be subject to state sales tax laws.
If it looks like this ruling could affect your company, you may want to start looking into sales tax software programs that can help you with compliance. Eventually, you will need to register in all the states where you’re required to pay sales tax, assuming these states pass laws requiring the collection and remittance of such taxes.