Online Retailer Sales Tax Collection Requirements Face Major Changes by Supreme Court Decision on the Wayfair Case

The Supreme Court ruled yesterday on the South Dakota v. Wayfair, Inc. case that could drastically change online retailer sales tax collection requirements. The ruling changes when a business is considered to have a “presence” in a state, forcing the online retailer to collect sales tax in that state. The impact is huge and far-reaching, and online retailers need to be aware of this ruling and watch for new laws enacted in all 50 states that could force online retailers to collect sales tax in many states.

In the 5-4 decision, the Supreme Court held that a state may impose a sales tax collection obligation on a seller of products to residents of that state, even if the seller has no physical presence in the state. The ruling changes the long-held reliance on the “Quill Corp. v. North Dakota” case in 1992 that laid the groundwork for when a business was considered to have a physical presence in a state that would force the business to collect sales tax. In a vast majority of cases, a business that did not have employees, property, inventory, or rented property in a state was not considered to have a physical presence in a state and, therefore, did not have to collect sales tax on shipments to within that state.

The “Wayfair” ruling yesterday drastically changes that. The decision ruled on the legality of the South Dakota statute, which requires out-of-state sellers to collect sales tax if the seller annually sells more than $100,000 in goods or services delivered to customers in South Dakota, or engages in 200 or more separate transactions/deliveries into the state. Having a physical presence in the state is removed as a factor and this changes the game for online retailer sales tax collection requirements.

Many believe this $100,000/200 transaction threshold will be a safe harbor for other states to build their sales tax collection laws around. In other words, if you don’t sell that much into a given state, you may not be affected. But are you out of the woods? Not necessarily.

First, states need to enact new laws regarding online retailer sales tax collection requirements that will not be challenged in court. That could theoretically mean 50 new state laws to stay on top of. It also could theoretically mean 50 variations of state laws. Some states impose a state-wide sales tax. Others require the seller to collect based on the location to which you ship and could mean hundreds of sales tax rates and remittance locations to send those tax dollars. However, the expectation is that states will form new laws using the South Dakota law as a model to prevent future legal challenges by internet sellers. If you are a fairly large internet retailer, you will need to at least be aware of potential states requiring sales tax collections.

Second, you may need to have reporting capabilities that capture sales dollars going into each state, even if you are never required to collect and remit sales tax in any state other than the state in which you reside or do business. I can imagine situations where a state challenges the fact you are not collecting sales tax. You will need to have the data to support the fact you don’t fall under their sales tax rules.

Fortunately, there are several companies that are making the administration of sales tax collection much easier. Tax Jar automates your sales tax collections, reporting, and filings. Avalara is another large company in this niche.

At this time, online retailer sales tax collection requirements have not changed, yet. Nothing much has changed except for this ruling which states can now use to craft new legislation. Unless you are shipping more than $100,000 or 200 transactions into South Dakota, you can continue business as normal, at least for right now. But you do need to be aware of new laws as they are enacted in the other states, especially if you are a larger internet retailer selling over $100,000 of goods or services into other states.

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