The June 21 Supreme Court ruling in the case of South Dakota v.Wayfair, Inc. should encourage all businesses, large and small, that sell their goods online, to re-evaluate their sales tax collection procedures and to learn more about how this ruling may affect their business.
In Wayfair, the Supreme Court reversed its 1992 decision in Quill Corporation v. North Dakota. Under Quill, states were constitutionally precluded from forcing out-of-state retailers lacking a physical presence in those states to collect and remit sales tax on sales to in-state customers. However, following Wayfair, states are poised to start enacting laws to collect sales tax from retailers even if no physical presence by the retailer has been established.
The Court, in a result seen as a major victory for traditional brick-and-mortar retailers, stated that although some state tax laws could still run afoul of the Commerce Clause of the U.S. Constitution, South Dakota’s law (described below) did not burden interstate commerce. Therefore, the state could require out-of-state sellers to collect and remit sales tax to South Dakota as if those sellers had a true physical presence in the state.
New Jersey, like New York, already had adopted a 2014 law that required large Internet retailers to collect and remit sales taxes even without a physical presence in the state. This law is commonly referred to as the “Amazon Law,” and it generally relies on recognizing a “nexus” or connection between the purchase of a personal item and the use of a link on an Internet website. Several states have adopted a similar law to deal with Amazon.com and other giant Internet retailers that sell to individuals without collecting state sales taxes.
However, the Wayfair ruling involved a more specific set of circumstances for a finding of sales tax nexus with South Dakota, namely:
1) if a seller has annual sales of more than $100,000 in the state; or
2) if a seller completes more than 200 transactions in the state
Although not a requirement for every state, the above standard met with the Supreme Court’s approval, which suggests that similar standards may also pass constitutional muster. Indeed, the New Jersey legislature has expanded its nexus provisions in ways similar to those of South Dakota’s. Keeping up with the potential changes in New Jersey and preparing for future changes will be an important component for successfully navigating your business through these dynamics.
The administrative burden in understanding and complying with these changes may seem overwhelming. Businesses without in-house tax departments or other related resources might have trouble simply staying aware of where their company falls in these guidelines or if their sales have grown to fit their state’s laws.
Some companies may be aware of the changes but are not able to properly address them. This is where relying on certified public accountants who work to understand the minute details of constantly changing laws can keep you and your company within compliance. They can reduce your exposure, adjust your strategies, and consult with you in determining how your business can thrive and respond in a dynamic sales tax environment.
While the Supreme Court affixed its stamp on the Wayfair ruling, other states will be lining up to adjust their laws as fast as possible. Thirty-one states already have laws taxing Internet sales, and those states may now choose to revise their laws in order to make sure they pass constitutional muster following the Wayfair decision. The U.S. Congress may even step in and establish uniform sales tax rules. It is therefore imperative that small and large retailers that sell online keep their accounting and tax procedures up to date to avoid sales tax-related fines or penalties.
If you need guidance on your sales tax procedures, contact MSPC for assistance.