Review our guide to sales tax rates and thresholds for small businesses that sell to out-of-state customers
In 2018, the decision in the U.S. Supreme Court case South Dakota v. Wayfair drastically changed long-established out-of-state seller tax rules. After Wayfair, states can require that out-of-state retailers collect sales tax from in-state customers even if the retailer does not have a physical presence in the state such as a store, warehouse, office, or employees. Nearly four years later, many small businesses are still struggling to navigate the consequences of this court decision and its tax requirements.
Prior to the Court’s decision in South Dakota v. Wayfair, states could require out-of-state sellers to collect and remit taxes to the state only if the seller maintained a physical presence within the state’s borders. After the Wayfair decision, states may now require remote sellers to collect and remit taxes if the seller has an economic nexus within the taxing state. Each state’s definition of “economic nexus” varies, with some setting a minimum threshold of transactions, others setting a minimum gross sales threshold, some a threshold of both transactions and sales, and more. These complex rules can be especially difficult for small businesses to comply with, in part because small businesses often must navigate them without the teams of CPAs and attorneys used by big business.
Beyond the challenges presented by the nation’s patchwork of varying state thresholds and remote seller tax requirements, awareness of the consequences of South Dakota v. Wayfair is low. A 2020 survey of businesses revealed that over 40% of respondents were completely unaware of the Supreme Court decision in South Dakota v. Wayfair and its impact on sales tax collection.
As a starting point, small businesses can look at NFIB’s newly released state sales tax guide, which provides a valuable overview of out-of-state tax rates.
As Tax Day approaches, now is a good time to seek professional guidance. If your business sells products across state lines, you will likely need to consult with a tax advisor or CPA to assess state sales tax compliance needs and create a plan to meet them. Software is also available to help navigate these requirements but does not always account for state law changes or determining where your business should file.