The (New) Cost of Doing Business: State Sales Tax for Online Purchases
Originally published on October 23, 2018
Updated on October 27th, 2023
You might soon pay more for your online purchases thanks to the U.S. Supreme Court’s ruling earlier this year to allow the collection of state sales tax from out-of-state online retailers.
On June 21, 2018, the court ruled in the South Dakota v. Wayfair case that the physical presence rule established in a 1992 case was an “unsound and incorrect” interpretation of the Commerce Clause that skewed the retail industry in favor of remote sellers.
The concept in question was “nexus,” which is the link between a business and the territory governed by a taxing authority. In 1992’s Quill v. North Dakota, the court ruled that retailers must have a physical presence in a state in order for that state to collect sales tax from customer purchases. Given the infancy of online commerce at the time, this decision had little effect on competition between internet retailers (of which there were few) and local brick-and-mortar businesses.
In the new ruling, however, the court cited the shift in the retail industry and how the current system has been skewed in favor of larger retailers. Justice Anthony Kennedy likened the physical presence requirement to a “judicially created tax shelter” that distorts marketplaces. (In fact, some of these companies were advertising the fact that customers didn’t have to pay state sales tax as a benefit of buying from them.)
The ruling follows years of speculation (and in some cases, proactive legislation) that the physical presence requirement would be overturned. There are already 21 states with laws in place to collect sales tax from remote retailers—measures meant to level the playing field for physical stores and allow these states to claim much-needed revenues. These economic nexus laws generally set minimum dollar amounts and/or sales volumes to ensure that the laws don’t penalize smaller companies that still do the majority of their business in stores.
For example, Georgia recently enacted a law that requires out-of-state sellers to collect sales tax from states in which their customers live if they make $250,000 in gross receipts and engage in 200 or more retail sales in that state during a 12-month period. (A qualifying retailer can also opt to provide “tax due” notices to their customers.) New Jersey requires large internet-based sellers such as Amazon to collect and pay state sales tax under certain conditions and sales thresholds. And of course, South Dakota’s law with its $100,000 threshold was the catalyst for the Wayfair case.
Additionally, both Georgia and New Jersey are members of the Streamlined Sales and Use Tax Agreement (SSUTA). Started in 2000 as the Streamlined Sales Tax Project, the SSUTA is an agreement between nearly two dozen states that minimizes differences between their respective state sales tax policies and practices. It also reduces administrative and compliance costs for taxpayers and provides state-funded sales tax administration software.
So what happens now that the Wayfair case is decided? Since the ruling hit, several states have issued post-Wayfair guidance regarding these matters. These steps range from announcing reviews of their current sales tax policies to expressing complete implementation and compliance with the new law.
States with existing measures will need to apply the Wayfair test to determine whether their standards are constitutional. Additionally, some retailers have been proactive in anticipation of this judgment. Amazon, whose dominance in online retail is often seen as having spurred the creation of the SSUTA and state-based laws, already collects sales taxes in the 45 states that levy them. There is also speculation that the abandonment of the physical presence requirement can affect corporate income taxes, payroll taxes and more in the years to come.
If your business sells to clients across state lines, contact James Moore’s state and local tax CPAs to see how this ruling might affect you and how you can ensure your compliance both now and in the years to come.
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