New Sales Tax Laws for Businesses with Substantial Economic Nexus in Wayfair’s Wake
The recent U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. reverses the Court’s previous position regarding the collection of sales tax by out-of-state businesses and presents new tax compliance challenges for businesses that sell across state lines.
The Old Law
Previously, U.S. Supreme Court decisions held that a state could not collect sales tax from an out-of-state seller if the out-of-state seller did not have a physical presence in the state. Instead, the state had to try collecting the sales tax from the consumers in the state. This collection system allowed out-of-state sellers to offer a cheaper price than in-state sellers because the out-of-state sellers did not have to include sales tax in the purchase price.
The New Law: Substantial Economic Nexus After South Dakota v. Wayfair, Inc
In South Dakota v. Wayfair, Inc., the U.S. Supreme Court overruled its previous decisions and stated that the lack of physical presence no longer bars a state from collecting sales tax. Instead, the Supreme Court concluded that a state could collect sales tax from an out-of-state seller if the seller had a “substantial economic nexus” with the state. In South Dakota v. Wayfair, Inc., a South Dakota statute defined a seller with a “substantial economic nexus” as one that annually delivered $100,000 or more in goods or services to South Dakota or that annually engaged in 200 or more separate transactions for the delivery of goods or services to South Dakota.
What This Decision Means for Businesses
States seeking to collect sales tax from out-of-state sellers now have an avenue to do to so by passing a statute similar to the one passed in South Dakota. While many states currently do not have such statutes, many states are in the process of drafting similar legislation. Businesses that sell across state lines that previously did not collect sales tax must be aware of legislative changes to sales tax collection in the states where they do business. Failing to comply with these sales tax statutes could result in the states imposing penalties and late fees on the business.
But this change does come with some good news. First, requiring out-of-state sellers to collect and pay sales tax will make pricing more competitive as out-of-state sellers will no longer be able to offer goods and services without charging sales tax. Second, small businesses or businesses that transact minimal business across state lines will likely be unaffected by these changes and will not incur the costs of having to comply with these changes. Thresholds on the amount of business or transactions done in a state are likely to vary by state though, so businesses should consult an attorney or tax professional to ensure their compliance.
Collecting sales tax on out-of-state sales presents challenges to businesses, particularly those that engage in business across multiple states. One option is manually tracking the sales tax due, though this option comes with the risk of error and potentially, high costs. In South Dakota, the state provided access to sales tax administration software that businesses could use for tracking sales tax due. This software came with the added benefit of providing immunity from audit liability to sellers who used it. Thus, sellers may want to check whether the states they do business in provide, or plan on providing, similar software. Additionally, private companies offer a number of sales tax software solutions that can calculate and remit sales tax for any state.
As always, if you have any questions or concerns, please contact a C&G Business Law attorney to discuss your specific situation and what steps you can take to ensure compliance with these or related laws.