A lot of people are talking about the U.S. Supreme Court’s June 21, 2018, decision in South Dakota v. Wayfair, No. 17-494, which makes it easier for states to collect sales tax from out-of-state companies selling a product to in-state costumers. The Court upheld a South Dakota law requiring out-of-state businesses to collect and remit sales taxes if they make 200 separate sales or $100,000 worth of sales within the state, without regard to whether the company has a physical presence in the state. Accordingly, online retailers, as well as brick-and-mortar businesses selling products across state-lines, need to consider whether sales tax needs to be collected for out-of-state sales.
Background
Wayfair upends a rule, that courts had enforced for decades, precluding states from taxing out-of-state companies unless they had established a physical presence in that jurisdiction. For example, a company warehousing inventory (or with an employee) in Colorado would have had to collect and remit Colorado state sales tax in the past, while a company with much higher sales volume to Colorado customers was exempt if its only contacts were with customers online. But the Wayfair decision repudiates the old rule in holding that sales volume may trigger a duty to pay taxes to a state. In other words, a company operating exclusively in Pennsylvania or Ohio may have to collect and remit sales tax in any number of jurisdictions where it may have online sales—from Hawaii to Florida.
Effect on Businesses
While the Supreme Court acknowledged that the decision might greatly complicate business for out-of-state sellers, the Court held that the physical presence rule was unfounded from the beginning. Further, the Court said that the old physical presence rule was “unfair and unjust” to “competitors, both local and out of state, who must remit the tax…” That reflects the severe split in opinion on this issue among the small business community—with brick-and-mortar businesses and online companies deeply divided in their views. So, while it is possible that Congress may step-in with legislation to address the problems created by this decision, the reality is that competitors are likely to butt heads on different policy proposals.
We may also expect the lower courts to flesh-out some still unanswered questions. While it is clear that South Dakota’s threshold for requiring businesses to collect and remit state sales tax is constitutional, other states may be more aggressive in requiring businesses with fewer sales to collect and remit taxes. Meanwhile, businesses selling products across state-lines should seek advice from a trusted tax attorney or a certified public accountant to confirm whether they have new duties to collect and remit sales taxes in different jurisdictions. If so, businesses are advised to talk with legal counsel and or their CPA about how best to comply with those obligations, with minimum administrative burdens.
Updated June 26, 2018
