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 the Supreme Court, in a case called S. Dakota v. Wayfair, increased the ability of states to require internet sellers to charge sales taxes. So what does that mean for your internet business?
Does My State Require Internet Sales Taxes?
A state's ability to tax transactions is based on the concept of tax nexus, meaning that the seller has a presence in the state. Your company can have a nexus if it is doing business in the state, including:
- Having a physical office or a place where you conduct business (in your home, for example),
- Selling or shipping products to a buyer in the state,
- Having a distribution center, like a warehouse or storage area,
- Having employees who work in the state, including independent contractors, salespeople, representatives, or agents.
The Supreme Court has upheld South Dakota's law on internet sales tax, which says that ut that doesn't mean other state laws will be the same. Other states are changing their laws to make them similar to the South Dakota law, but that will take some time and there will be other lawsuits.
The Wayfair opinion identified three features in South Dakota's law that "...appear designed to prevent discrimination against or undue burdens upon interstate commerce...," specifically:
- Small business protection or threshold
- Not applying the law retroactively; and
- South Dakota's membership in the Streamlined consortium of states.
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.
Most states will require only larger retailers to impose internet sales taxes. What determines a "larger retailer" is set in each state is determined by amounts called thresholds, based on
- Sales (gross sales, gross revenues, retail sales or taxable sales), or
- The number of transactions.
Some states base their threshold on both sales and transactions.
S. Dakota v. Wayfair and Your Online Business
Here's what you need to know about this new ruling, for your business:
Check your state law regarding internet sales tax.
The South Dakota law makes smaller online sellers 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 thresholds, and state laws are changing as states try to accommodate the new reality. If you have a very small online business, for example, a home-based business, it's likely that you won't be affected.
The Streamlined Sales Tax Governing Board has guidelines for remote sellers, showing the threshold for charging sales tax in each state. This information is updated periodically.
Consider sales tax software.
If you are a larger online seller, you will have to deal with differing state thresholds in addition to changes in tax rates for states and localities where you do business. If you are a larger seller, you may want to look into sales tax software to help you keep track of everything.
In general, be alert to changing sales tax laws.
The internet sales tax situation will be constantly changing for the next few years as states change their laws.
S. Dakota v. Wayfair: Background
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.
The 1992 Quill Decision: Trying to Set a Definition of Nexus
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 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." (in other words, a tax nexus). 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, an online seller that was located in Iowa and sold to customers in Iowa would have to charge sales tax. But if the buyer was online in Illinois, the seller wouldn't charge sales tax because the seller didn't have a sales tax nexus in Illinois.
S. Dakota v. Wayfair: A Test Case
Since the Quill decision, states have become aggressive in expanding the definition of tax nexus in order to stop the outflow of tax revenues. Several states have crafted internet sales tax legislation, which has produced lawsuits by online sellers like Wayfair and Overstock.
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 as the requirement for collecting internet sales tax.
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."
What Now for Internet Sales Taxes?
The Wayfair case may have settled the internet sales tax situation, but only temporarily. The Wayfair case dealt with one specific state, and the Court based its opinion on the circumstances of that state:
The law at issue requires a merchant to collect the tax only if it does a considerable amount of business in the State; the law is not retroactive; and South Dakota is a party to the Streamlined Sales and Use Tax Agreement...
But the Court expressed concern that future cases might deal with issues of retroactivity and the burden on small businesses. Justice Kennedy said,
These issues are not before the Court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses.
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 "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.
Tax Foundation. "A Very Short Primer on Tax Nexus, Apportionment, and Throwback Rule." Accessed Nov. 25, 2019.
Legal Information Institute. "S Dakota v. Wayfair, Inc." Accessed Nov. 27, 2019.
Streamlined Sales Tax Governing Board, Inc. "Nonmember State Participation in Streamlined." Accessed Nov. 26, 2019.
Streamlined Sales Tax Governing Board, Inc. "Remote Seller Guidelines." Accessed Nov. 26, 2019.
Office of the Attorney General South Dakota. "Petition for Certiorari Filed in South Dakota v. Wayfair, Overstock and Newegg." Accessed Nov. 26, 2019.
Supreme Court of the United States. "SOUTH DAKOTA v. WAYFAIR, INC., ET AL:. No. 17–494." Page 26. Accessed Nov. 26, 2019.