In 1967 and 1992, the United States Supreme Court decided cases that formed the operating framework of how states could impose the requirement that a business collect/remit sales tax on behalf of a state. The central theme around this framework was that states could not impose on out-of-state sellers the obligation to collect and remit sales taxes for sales made to customers in states where those sellers had no stores, warehouses, or other physical presence. This being more than fifty years ago, the invention of the internet and online shopping posed great questions regarding this law.
On June 21st, 2018, the United States Supreme Court ruled in favor of South Dakota in the highly watched South Dakota v. Wayfair decision. Prior to this ruling, an online seller only had to collect sales tax from buyers in states where the online seller had a physical presence. This physical presence requirement was known as “sales tax nexus.” By ruling in favor of South Dakota, The Supreme Court has decided physical presence is not required.
In 2016, South Dakota passed a law which required any online seller to collect South Dakota sales tax if they either made more than $100,000 in gross sales in the state calendar year, or made over 200 individual sales in the state each year. This caused major push back as the law disregarded if the online sellers had nexus in the state or not. The state of South Dakota followed the passing of this law up by suing Wayfair, Newegg, and other e-Commerce retailers who currently did not collect South Dakota sales tax.
So…what does this mean? States are no longer bound by the concept of sales tax nexus. Instead, any state is allowed to enact laws that allow for the collection of sales tax from remote sellers. This adds a significant sales tax compliance burden for online businesses. Some states have already started to enact tax laws that will apply to remote sellers. Most states will likely conform to the South Dakota law or to the Court’s guidelines, but some may be more aggressive.
For more information, always consult a Certified Public Accountant. Submitted by: Michael Kalifeh, Shareholder, Tax Services, Thomas Howell Ferguson P.A. CPAs. To ask Michael a question, contact him here.
