The Previous “Physical Presence” Requirement and the Supreme Court Decision
Until the Supreme Court’s decision in South Dakota v. Wayfair Inc., the rule in the US was that a US state could not require companies without a “physical presence” in that state to collect sales taxes with residents.
Instead, the obligation to pay the sales tax would be on an individual resident, something that almost never happened. The result was that online retailers like Amazon could sell products at a cheaper price than local businesses in many states, giving them a major competitive advantage, and those states lost important sales tax revenue.
This changed on June 21, 2018, when the Supreme Court overturned the old rule in a case brought by the state of South Dakota against Wayfair, Overstock.com, and other online retailers. The Supreme Court held that the old rule made no sense in an age of online sales (Interestingly, 4 of out the 9 justices dissented from the decision, not because they thought the old rule was correct but because they thought this kind of major switch in the nation’s sales tax laws should be decided by Congress, not the Supreme Court).
What Does the Ruling in South Dakota v. Wayfair Inc.: mean for Your Business?
As a result of the Supreme Court’s decision, it is now entirely legal for individual states to require out-of-state businesses to collect and remit sales taxes on sales to state residents. That potentially means any New York-based business now has to comply with the sales tax laws of 49 other states.
Given the complexity of sales tax laws and the differences in sales tax laws between different states, this could be a potentially huge administrative burden, especially on new and small businesses selling goods online. That said, various accounting software systems such as QuickBooks, FreshBooks, Square, as well as others are now rolling out functionality to handle this requirement.
Potential impact on non-New York businesses selling into New York State
Following the ruling, New York State issued updated guidance for out-of-state sellers (those selling into the state) on their sales tax collection obligations. Effective as of June 21, 2018 (the date of the South Dakota v. Wayfair Inc. decision), the guidelines state that the sales tax collection requirement: “…applies to all remote sellers meeting [a] $300,000 sales and 100 transactions threshold in the immediately preceding four quarters.”
Businesses that sell goods online should also note that sales made through online marketplaces are to be included when calculating the threshold. Remote sellers must file a certificate of registration within 30 days after the date the threshold is reached and begin to collect tax 20 days after that.
What about New York-based businesses selling into other states?
Numerous states are updating existing laws or putting new guidelines into practice. With approximately $13 billion in unclaimed tax revenue on the table, no state wants to miss out. Here are a few examples of what different states are doing:
California: as of April 1, 2019, out-of-state retailers need to start collecting and paying use tax when sales exceed $100,000 or California customers make 200 or more purchases from them in the preceding or current calendar year.
Illinois: similar to California, out-of-state retailers must also collect and pay a Use Tax for sales over the $100,000 or 200 transactions threshold, as of October 1, 2018.
Texas is another state implementing remote seller legislation, with a $500,000 threshold, enforceable from October 1, 2019.
Most states that already have sales taxes in place (45 in total) either already have out-of-state sales tax collection requirements in place or are working to get those enacted. MGLS strongly recommends that if your business is selling remotely customers in other states, you take the time to look into the specific out-of-state sales tax collection requirements that may be applicable to your business.
Disclaimer: This article constitutes attorney advertising. Prior results do not guarantee a similar outcome. MGLS publishes this article for information purposes only. Nothing within is intended as legal advice.