Warning! Sales Tax on the Internet: South Dakota v. Wayfair
The United States Supreme Court recently ruled in South Dakota v. Wayfair, Inc. that states have the right to apply sales tax to online sellers who sell items on the internet that are shipped into their respective states. This is a major change to the sales tax law for states, and this ruling changes the sales tax prior requirements. As a result of this sale tax ruling, businesses and companies who sell products on the internet (on such sites as eBay, Amazon, and any other similar sites) are all affected. These online businesses and companies may now be liable, depending upon which state they are shipping to, for collecting and remitting sales tax for each state.
The Wayfair ruling overruled a long standing rule that sellers only need collect sales tax if they have a physical presence in the state. This previous ruling allowed online businesses and companies selling items over the internet to ship items to people outside of the state they were located in and not be required to collect and remit sales tax. As Justice Kennedy, speaking for the Supreme Court, explained: “In two earlier cases the Court held that an out-of-state seller’s liability to collect and remit the tax to the consumer’s State depended on whether the seller had a physical presence in that State, but that mere shipment of goods into the consumer’s State, following an order from a catalog, did not satisfy the physical presence requirement..”
In the Wayfair case, South Dakota enacted a legislative act within its tax code stating that any corporation or individual selling items in or shipped into South Dakota where the total amount during any given year was $100,000 or greater was required to collect and remit sales tax. The Supreme Court recently ruled in South Dakota’s favor allowing them to collect sales tax from internet sales. The Supreme Court explain, in its rationale, “This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State.”
While the Supreme Court did not set a threshold as to a fair number of when a state can and cannot collect sales tax from out of state sellers, online businesses and companies should become familiar with states’ local sales tax laws so they can ensure they remain in compliance. Online sellers should also note how much they are shipping into certain states where similar laws exist to ensure they remain in compliance as the flood gates are sure to open now upon those selling on the internet by local states.
Although it is unlikely the small individual sellers will be required to collect and remit sales tax if a certain threshold does not exist, the seller also needs to be aware that the threshold does exist and if they cross that threshold they can be held liable for the taxes, including for items already sold, so taxes should be collected on all items. While this Wayfair decision may cause issues for certain small sellers who do not have the ability to handle the administrative task of collecting sales taxes in all the states that require them, not collecting those taxes could be more of a financial burden then not collecting them. It is imperative that internet sellers and online businesses familiarize themselves with all sales tax laws to ensure they are properly registered in those states to which they ship.
Robb Longman’s extensive background in tax law and business law provides him with the ability to advise his clients on all types corporate and tax issues including sales taxes. Robb is currently the Assistant Secretary of the American Bar Association’s Tax Section and the former Chair of Maryland State Bar Association’s Tax Section. Robb regularly works with business and individual clients on all types of tax matters to devise strategies to help them minimize their taxes in their business transactions and personal concerns.
