Internet Sales Tax: Who Has to Pay?
Sales Taxes for Internet Transactions - Which States?
Do you sell online? If so, you are probably confused and frustrated trying to figure out internet sales taxes on products you sell. An answer of sorts has come, finally.
After years of confusion, the internet sales tax issue was sent to the Supreme Court, in a case called S. Dakota v. Wayfair. In June 2018, the Court ruled for the state of South Dakota, saying that online sellers had an unfair advantage and that states have the right to require online sellers to charge and collect sales tax to buyers in their state.
According to Forbes, the Court said that the Quill case (see below) and other previous cases were "artificial and anachronistic" and the prevalence of internet sales gave an unfair advantage to online sellers.
Update: Does My State Require Internet Sales Taxes?
Since the 2018 Supreme Court ruling, more and more states are requiring that larger retailers include sales taxes on internet transactions. According to the Associated Press, as of October 1, 2018, 11 states began enforcing their own new regulations, with more in the near future. Most states will require only larger retailers to impose these taxes; this amount will be different for each state. To find out more about the requirements in your state, check with your state's taxing authority.
What S. Dakota v. Wayfair Means to Your Online Business
Here's what you need to know about this new ruling, for your business:
Sales tax is a state issue. The Supreme Court has upheld South Dakota's law on internet sales tax, but that doesn't mean other state laws will be the same. Other states will probably be scrambling to make their laws similar to the South Dakota law, but that will take some time and there will be other lawsuits.
Currently five states - Delaware, Montana, New Hampshire, Alaska, and Oregon - have no state sales taxes, so if you do business in those states, you don't have to worry about this issue.
Small online sellers may not have to collect internet sales taxes. The South Dakota law makes smaller online sellers to be exempt from collecting sales tax if they have less than $100,000 in annual sales or fewer than 200 transactions. Other states will have different minimums. If you have a very small online business it's likely that you won't be affected.
The question of the retroactive collection is still up in the air. South Dakota is not requiring the retroactive collection of internet sales taxes, but other states may.
In general, be prepared. The situation will be constantly changing for the next few years, and there is also a chance that Congress may make it easier for everyone and pass a national internet sales tax law. If you are a larger seller, you may want to look into sales tax software.
Economic Nexus - The Tax Situation
The South Dakota v. Wayfair case was based on economic nexus - a tax presence based on annual sales, transactions, or both. If you are wondering about the situation with economic nexus in your state, here is a map of states by economic nexus (June 2018).
The South Dakota v. Wayfair Case: Background
To understand the issues related to the Wayfair case, it's necessary to go back to the beginning of the internet and the question of how to charge internet sales tax.
The history of sales taxes in the U.S. isn't that old. Sales taxes in the U.S. have traditionally been the right of the individual states, who started requiring merchants to charge tax on items for sale in the late 1920s and into the Great Depression. Sales taxes were seen as a way to help fund state activities in an era of low income. Today, all states except Alaska, Delaware, Montana, New Hampshire, and Oregon charge sales tax.
In the beginning, sales tax was simple because it was local. People bought at home, from local merchants. it was easy to figure out what sales tax rate to charge. As people became more mobile, buying further away from home, what rate to charge became more difficult to determine.
With the advent of the internet, the problem of how to charge sales taxes on transactions over the internet became an issue. State governments complained that they were losing tax revenue and local "bricks and mortar" merchants were worried about losing sales.
A 1992 Supreme Court decision (the Quill v. N. Dakota case) attempted to address the issue of internet transactions. According to the Tax Foundation, the Quill decision said that a business "must have a physical presence in a state in order to require the collection of sales or use tax for purchases made by in-state customers." This physical presence is called a tax nexus. The tax nexus concept originally meant a physical building, office, warehouse, retail store, or employees selling in the state.
The Quill decision really didn't solve the problem, because only those online merchants who had a tax nexus in a state were supposed to charge sales taxes. For example, if an online seller was located in Iowa and she sold to customers in Iowa, she would have to charge sales tax, but not if she sold to customers in Illinois.
The Growing Muddle of Internet Sales Tax
Sales taxes bring in big revenue for states, but they have to act carefully. If one state charges more sales tax than its neighbors, people start to cross state lines to buy big-ticket items. If the economy takes a dive and people buy less, states feel the crunch too. And more recently, buyers have started deliberately avoiding state sales taxes by buying on the internet.
In addition to states, many localities also charge sales taxes. Today, localities in 38 states charge sales tax and these are added to state sales taxes.
To add to the confusion, how states determine the sales tax rate differs, with some states charging tax on the location of the buyer and others on the location of the seller (origin-based and destination-based sales tax). In some states, localities may have either origin- or destination-based sales taxes, adding to the confusion.
Since the Quill decision, states have become aggressive in expanding the definition of tax nexus in order to stop the outflow of tax revenues. Some states have taken a tax nexus to mean the presence of an affiliate. For example, Amazon sellers have been called affiliates, and California (among other states) has enacted state laws stating that the presence of an affiliate creates a tax nexus in that state, thus the requirement that sales tax be charged on all internet sales taxes from these affiliates.
According to the Tax Foundation, 31 states have expanded their sales tax to include internet sellers. Some use concepts such as click-through nexus, affiliate nexus, and economic nexus (all complicated concepts).
Congress has attempted several times to pass what's been called a Marketplace Fairness Act to solve the problem, with no version making it through the process. The most recent of these acts is in suspension, waiting for the Court's decision. Both bills include exemptions for small sellers and ways to monitor sales tax collections and make the process more fair to all types of sellers.
A more recent bill stalled in Congress is the Remote Transactions Parity Act (RTPA). include a small seller exemption and would give states the right to charge internet sales taxes if the state agrees to adopt "meaningful simplifications" to their sales tax systems.
Amazon, the elephant in the room of the sales tax discussion, has changed its stand on the internet sales tax issue. Originally, the company fought to have internet sales tax imposed on purchases, but now it has distribution centers (tax nexus) in almost every states. In 2017, the company announced that it would charge sales tax on all its transactions, except for states that don't have sales tax.
Obviously, some clarity in this muddle is necessary.
A State Sales Tax Organization to Simplify Sales Tax
One simplification is already in existence. It has been suggested by a previous Marketplace Fairness Act to expand an existing organization to help keep the process of collecting internet sales taxes fair. This non-profit organization, called Streamlined Sales Tax (SST)was created in 1999 as a way to i "simplify and modernize sales tax administration." At present, 44 states have agreed to participate, with centralized administration and reciprocity agreements, standardized tax rates, and uniform tax bases.
Under this agreement, states agree to encourage sellers to collect internet sales tax to customers living in the states that are in the SST organization.
The S Dakota v. Wayfair Case: Background
Several states have crafted internet sales tax legislation, which has produced lawsuits by online sellers like Wayfair and Overstock. As a test case, South Dakota has petitioned the U.S. Supreme Court to revisit the Quill case. Specifically, S. Dakota asked the U.S. Supreme Court "to overrule Quill’s physical-presence requirement which currently prevents the State from requiring out-of-state retailers to remit taxes for sales made within South Dakota."
In 2016, South Dakota passed a law that would require out-of-state retailers to collect and pay internet sales tax in the same way and at the same rate as in-state retailers. The only applies to larger retailers who have more than $100,000 in sales or more than 200 sales transactions in a year in the state, sparing smaller sellers from the requirement to collect internet sales taxes. The state law would use the presence of the buyer in the state (a destination-based tax) as the requirement for collecting internet sales tax.
In October 2017, South Dakota petitioned the Supreme Court, and in April 2018, the Court heard oral arguments. The Court will present its opinion in June 2018.