South Dakota V. Wayfair:
New and substantial changes regarding sales tax
In the past, based on a 1992 decision commonly known as Quill (Quill Corp. v. North Dakota, 1992) online retailers needed to have a “nexus”, a physical presence in a state in order to be required by a state to collect state sales tax. Some have referred to that rules as an “online sales tax loophole.” Others felt it was quite proper that a state not be allowed to tax non-resident businesses. On June 22nd, in a 5/4 split the Supreme Court ruled that the “anachronistic” Quill physical presence standard was impractical and effectively discriminated against in-state sellers. They said requiring physical presence gave out-of-state retailers an advantage over in-state retailers. Consumers would purchase goods from them at an overall discount, because the retailer could not be forced collect the sales tax. Now the court believes, it has set a fairer economic nexus rule, and physical presence is no longer necessary to meet the nexus standard or full-test established in Complete Auto Transit (Complete Auto Transit, Inc. v. Brady, 1977).
Under this decision states can compel online sellers to collect state sales tax, as long as the Complete Auto Transit test is met. The test requires that: (1) the tax applies to an activity with a substantial nexus with the taxing state; (2) whether the tax is fairly apportioned; (3) whether the tax discriminates against interstate commerce; or (4) whether the tax is fairly related to services provided by the state.[1]
The Court did not clearly set out clear standards for taxing an activity with “substantial nexus” possibly leaving gray area and future appeals, but they did uphold South Dakota’s economic nexus legislation (Remote Seller Compliance Act, 2016). This provides other states with a roadmap in determining what may qualify as substantial nexus in the future. You can be sure other states will follow. At least 16 states have indicated they are setting their sales tax based on economic nexus instead of physical presence.
How will this affect you? If you are selling online:
A. Remote retailers lacking physical presence can still be subject to collecting sales tax when the remote retailer makes in-state sales exceeding $100K or makes 200 or more separate sales transactions in the previous or calendar year. (Remote Seller Compliance Act, 2016). The Court found that because Wayfair “engaged in a significant quantity of business” within the state and maintained an “extensive virtual presence” allowing the Court to find “substantial nexus” (South Dakota v. Wayfair, Inc. , 2018)
B. If you have substantial sales in a state you will need to determine first, are you required to collect sales taxes, second, are they only state or do they include local sales taxes, and what are the compliance rules for collecting and filing.
C. Even if you are not a seller, but a buyer, you should know whether you are required to pay taxes to a particular online seller.
D. Small sellers appear to still be exempt from this ruling, but what minimum threshold defines “small” was not established
E. Keep in mind, if you are selling through a large online platform such as Amazon, they may be required to add and collect sales tax your sales even if you are a small seller.
F. If you are going to maintain that you are a “small seller” not subject to this ruling it is essential that you track your sales by state for BOTH the total dollar amount of sales in each state and the number of sales in each state.
G. When you collect the sales tax, you must remember that you are holding it in trust for the state. Fraudulently diverting that money to another use can result in serious penalties.
Georgia’s new legislation places requirements online retailers who make $250,000 or 200 sales a year in GA (Sales and use tax; certain retailers to either collect and remit or notify purchaser and state, 2018). It should be noted that the “notification” requirements, to notify certain customers of their duty to pay use tax, is often more burdensome than collecting the tax. Illinois requires online retailers to charge sales tax to Illinois customers if the business has more than $100,000 in sales or 200+ transactions per year (Marketplace Fairness Act, 2018).
If you have questions about this new tax issue, be sure to contact me.
References
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (US Supreme Court 1977).
Marketplace Fairness Act, SB 2577 (2018).
Quill Corp. v. North Dakota, 504 U.S. 298 (US 1992).
Remote Seller Compliance Act. (2016). S. B. 106. South Dakota.
Sales and use tax; certain retailers to either collect and remit or notify purchaser and state, HB 61 (GA 2018).
South Dakota v. Wayfair, Inc. , 585 US (US Supreme Court June 18, 2018).