Collecting Sales Tax in the Wake of Wayfair: What You Need to Know
For years, if your company sold products online, a state could only require you to collect state sales tax if you had a physical nexus (offices, distribution centers, payroll, etc.) in that buyer’s state. The Supreme Court ruled in 1967 and again in 1992 that this physical presence test would apply.
For example, if a company that only had a physical presence in New Jersey sold sports equipment to teams all over the country, they would only have to collect state sales tax for transactions made in New Jersey.
However, the emergence of third-party marketplaces such as Amazon, Wayfair, eBay, Overstock, Etsy and Walmart.com led many states to question the fairness of this physical presence requirement. You have all these out-of-state vendors selling a tremendous amount of goods through these platforms, even though they’ve never set foot in the states where those sales are happening.
South Dakota vs. Wayfair
In 2016, the state of South Dakota passed a law that said out-of-state sellers must collect and remit sales tax “as if the seller had a physical presence in the state.” This rule would apply to sellers that generated at least $100,000 in sales or 200 transactions in the state. The South Dakota law led to a precedent-setting ruling from the Supreme Court in the case of South Dakota vs. Wayfair.
The Court sided with South Dakota. The previous nexus standard, which was based on physical presence, was interpreted as “unsound and incorrect.” Instead, sales alone would be sufficient to create nexus. As a result, online and other out-of-state retailers would be required to collect sales tax if the minimum sales thresholds were met.
Not surprisingly, many states saw this ruling as an opportunity to increase revenue and have passed their own similar laws. Sellers are now obligated to comply with the sales tax rates, rules, and processes of each state that enforces this new definition of nexus.
For example, New Jersey has passed a similar law with the same sales thresholds as South Dakota. However, in Pennsylvania, out-of-state sellers will be responsible for state sales tax when they surpass just $10,000 in sales.
What This Means for Online Sellers
It’s time to take a long, hard look at your sales history and forecasts. If you think you might exceed sales thresholds before the end of the calendar year, you should be collecting sales tax from buyers in those states. Otherwise, that money could come out of your pocket.
Because requirements are established at the state level, online sellers should expect inconsistencies. While many large online retailers have already been collecting state sales tax and have the staff and technology to manage complex rules, the Wayfair ruling could create a burden for smaller retailers. Some retailers are trying to simplify things and keep costs down for customers by eating the cost instead of collecting state sales tax from buyers, but that’s not a sustainable, long-term strategy.
Online sellers should implement a system for tracking and reporting sales by state in terms of the number of transactions and gross sales dollars. There is technology available that can automate tax calculations and decisions, but such solutions need to be configured properly to prevent errors.
Some industry experts believe major marketplaces will make changes to their platforms to ease the sales tax burden on third-party sellers, so it’s important to keep an eye out for those updates. For example, some states, including New Jersey, are requiring the online marketplace, not the third-party sellers, to collect and remit state sales tax. Not only do rules vary from state to state, but they can also vary from marketplace to marketplace.
Online sellers should also consult with their accountants to make sure they understand requirements involving not only tax rates, documentation, reporting and other processes, which could vary from state to state. If you have questions about how the Wayfair ruling could affect your online sales operation, contact us to schedule a consultation.