In June 2018, the U.S. Supreme Court ruled on a case that affected many online retailers across the nation. Before that decision, online and remote businesses did not have to collect sales tax unless the business had a physical presence in the buyer’s state. States were prevented from imposing greater requirements.
The decision in the new case, South Dakota v. Wayfair, changed all of that. It allows states to require remote sellers that meet a certain threshold to collect sales tax, even if they don’t have a physical presence in that state. It’s what many now call the “Wayfair Tax.”
What Is the Wayfair Sales Tax Decision?
The Wayfair Sales Tax decision resulted from a long process that ended up overturning a previous Supreme Court decision. The 1992 decision, Quill Corp. vs. North Dakota, had ruled that states could only collect sales tax from online purchases made in their state if the online business had a physical location in the state.
As technology developed and more commerce moved online, South Dakota and several other states attempted to challenge this decision by passing laws to collect sales taxes from online purchases in their state.
Several online, out-of-state businesses challenged the South Dakota law, and it eventually made it to the U.S. Supreme Court in 2018. The Court overturned the 1992 decision and ruled that states have the right to collect sales tax from online vendors with a substantial amount of sales.
Does My Company Have to Collect the Wayfair Tax?
In its ruling, the Supreme Court said that states couldn’t force a remote seller to collect sales tax from customers within the state unless the seller has a “substantial nexus” in the state. The tax collection also cannot place “undue burdens” on the remote seller.
The Court left this part relatively vague and undefined. They didn’t set specific parameters for these two thresholds. So far, the Court has allowed states to set their own standards. As a result, the definition of an economic nexus for sales tax can vary greatly by state.
The official decision did note that South Dakota’s current thresholds of $100,000 in sales or 200 transactions were ample to establish a “substantial nexus” in that state. It also said that these thresholds were sufficient to protect small sellers from any undue burden to collect sales tax.
So, if your company doesn’t meet these thresholds, you may not need to worry about collecting Wayfair Tax – at least for now. However, some states have made it very easy to establish an economic nexus in their state, so be sure to do your research.
What States Do I Have to Collect Sales Tax in?
Although the Supreme Court ruling applies narrowly to South Dakota, nearly every other state that imposes a sales tax has now passed similar legislation to South Dakota. To require the Wayfair Tax collection, states need to have statutes on the books regarding sales taxes for internet transactions.
The court’s lack of a clear definition of the threshold requirements creates a gray area, which might be resolved in future lawsuits or by federal legislation that could clarify the issue. It’s unlikely, though, that federal legislation will be passed anytime soon.
Generally speaking, you will likely need to collect sales tax for any state where you meet one or more of these requirements:
- Your business has a physical location there
- Employees of your business work in the state
- You store inventory in the state
- Your sales numbers or sales size meets the minimum standard set by the specific state
When Do I Need to Start Collecting Tax?
Requirements for qualifying companies vary by state. If you know that you definitely have a nexus in a state, you should immediately investigate their sales tax requirements and register your business.
Some states have considered making sales tax collection retroactive, but this seems unlikely to happen. If it did happen, it would also be largely targeted at massive interstate vendors like Walmart and Amazon.
In the Wayfair decision itself, The Supreme Court suggested that South Dakota should not seek to collect sales tax from remote sellers retroactive.
Many state revenue departments are working to provide guidance to remote sellers to help them quickly begin collecting tax. Organizations providing support to small businesses in your state would also be good resources for understanding your sales tax obligations.
What If I Sell Through a Marketplace?
While they’re not yet as ubiquitous as regular Wayfair Tax laws, many states also require online marketplace providers to collect tax on behalf of remote sellers who use their marketplace for sales.
If you meet the threshold requirements and sell through a marketplace and directly to customers, you need to be aware of the different laws pertaining to various sales. Even if you don’t have an economic nexus in a given state, consumers may still have to pay sales tax if they order your good or service through a larger marketplace platform.
How Do I Register and Collect Tax?
One of the best resources for registering and collecting the Wayfair Tax is the Streamlined Sales Tax Project. A visit to the SSTP website shows several useful resources, including the capability to easily register for collecting taxes in 24 states, taxability and rate information, and links to taxing authority websites. Support through SSTP is free for small businesses below a certain size.
Whether you are a remote seller or a local one, a knowledgeable bookkeeper or accountant can be of great service in navigating the various rules and statutes regarding sales tax collection. Make sure you’re meeting your requirements and being an effective steward of your company’s resources.