If you’re an online retailer you may have heard some buzz recently about the Supreme Court online sales tax ruling in the South Dakota v. Wayfair case. Their decision will change the way that retailers charge their online customers for state or local sales tax. If you’ve been able to skirt the online sales tax issue for most of your online sales, you should read the information below to better understand the new process you’ll need to put in place on your e-commerce website.
A Little Bit of History
First, let’s start by understanding how collecting sales tax for online sales worked in the past.
In 1992, the high court made a ruling on a similar case — Quill Corp v. North Dakota — and decided that online retailers only had to charge sales tax if the buyer lived in a state where the retailer had a physical presence (also called a substantial nexus). This physical presence could be a headquarters, physical retail store, or distribution center. So if you operated your headquarters and brick and mortar stores in Pennsylvania only and sold goods to a customer in North Dakota, that customer did not have to pay ND sales tax. This made it less expensive for the customer them to buy your products online and gave you a leg up over retailers with a presence in their state. Figures as recent as 2017 have shown that states could have collected $13 billion more in sales tax if they had been allowed to collect from online orders.
However, these shoppers weren’t meant to get off scot-free. When online retailers do not charge sales tax, consumers are still expected to pay a “use” tax which they need to declare on their annual tax return. Here’s a quick summary from Intuit Tax & Financial Center:
“In all states that impose a sales tax, purchasers owe tax on all taxable purchases. This is true whether the customer purchases from a store or from an online retailer. If taxes are not collected at the time of the purchase, the consumer is actually required to pay a use tax equivalent on an annual tax return.”
But — spoiler alert — no one is doing this. The number of annual tax returns that account for use tax is historically very low.
Fast Forward to the New Online Sales Tax Ruling
In 2016, South Dakota passed a law that required vendors to collect South Dakota state sales tax if they had more than $100,000 of sales in South Dakota or engaged in 200 or more transactions with in-state consumers — whether they had a physical presence in the state or not. Then several other states followed with their own laws concerning sales tax. Several big-name online retailers, including Wayfair and Overstock, sued South Dakota because they claimed this new law violated the previous Supreme Court decision.
In the latest online sales tax ruling, the court changed their position and decided that states can require sales tax be paid on an online sale, even if the retailer doesn’t have a physical presence in the state where a customer lives. (Here’s a quick recap of the ruling — with visuals!) In the U.S, 45 out of the 50 states collect sales tax, which means there is potential for many more state laws requiring that online retailers collect sales tax on online sales.
What This Means for Online Retailers
Bypassing sales tax and offering goods at a lower cost has made online sales a revenue driver for many retailers. Additionally, many argue that paying big taxes could negatively impact smaller online businesses much more than giant online retailers.
As an online business, the first thing you should do is talk to your legal or accounting professionals and determine if you will need to begin charging sales tax in certain states, based on this new ruling. And if you do, you need to register with the Revenue Department in those states.
From there, it’s time to enlist your website development team! You’ll need to get to work on updating your e-commerce site so it’s ready to collect sales tax. This will be a complex issue for many websites. Different states have different tax rates and also vary in the goods and services on which they collect taxes.
One of the easiest ways to track, calculate, and collect sales tax on your website is with the help of tax compliance software. These tools are available at a reasonable cost and make compliance easy. TaxCloud and QuickBooks Online are two options to explore. But even with readily available solutions, you’ll need your development team to ensure that the software is installed correctly. Failure to collect sales tax properly could result in a bill from the state(s) or potential class-action lawsuits for over-collection of tax.