10-9-2018 |
Update on Wayfair: Is Your Business Required to Collect Sales Tax for Sales to Out-of-State Customers?
By: BrownWinick
The internet is a powerful tool, especially for small businesses. But with great power comes great responsibility. The old adage rings true once again as the United States Supreme Court recently expanded states’ ability to require out-of-state sellers to collect sales tax in their states. This decision has the potential to subject Iowa businesses to a multitude of complex state sales taxes.
Until June 2018, states could only require businesses to collect sales tax if the business had a physical presence in the state. Some argued that this favored out-of-state businesses selling over the internet (not required to collect sales tax) at the expense of in-state businesses (who were required to collect sales tax). Others argued that any other standard would hurt small businesses by adding complexity for businesses using the internet to expand their consumer base.
In South Dakota v. Wayfair, the U.S. Supreme Court threw out the physical presence requirement in favor of a concept known as economic nexus. Under this new economic nexus standard, states can require out-of-state sellers, even those with no employees and no physical presence in the state, to collect sales tax. Although the opinion left many specifics to be resolved, the U.S. Supreme Court has ruled that South Dakota’s sales tax law satisfies the Constitution. Under South Dakota’s law, all sellers must collect sales tax if they have gross revenue of $100,000 from sales into South Dakota or have made 200 or more sales transactions to consumers in South Dakota. The Supreme Court reasoned that this threshold balances states’ desires to level the playing field while ensuring that “small merchants” do not become subject to cumbersome out-of-state sales taxes. See BrownWinick’s previous post for more information about the Wayfair decision.
Other states have enacted, or begun to enact, similar laws. In fact, nineteen states have similar economic nexus laws that are currently in effect or that go into effect October 1, 2018. These states are Alabama, Hawaii, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, North Dakota, Oklahoma, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin. Fourteen states have similar laws that will take effect later this year or early next year.
Rather than forcing sellers to collect sales tax, some states allow sellers to opt-in to a “notice and report” procedure. While each state notice and report law differs, the seller is generally required to provide multiple notices to the buyer and an annual notice to the state identifying customers who owe tax. These notice and report laws are purposefully intricate in nature in an attempt to persuade sellers to collect sales tax rather than use the notice and report procedure.
Each state law is different, but all laws require sellers to ask three questions: (1) does my business exceed the economic nexus threshold (assuming my business does not have a physical presence there), (2) if so, what products or services are taxable and at what rate do I need to collect the tax, and (3) where, when, and how do I register with the state and subsequently remit sales tax and file sales tax returns?
BrownWinick has a firm commitment to business and has gone to great lengths to stay up-to-date with the ever-changing developments in state sales tax laws after the Wayfair case. To learn more about economic nexus and what it means for your business, please contact any BrownWinick attorney in the tax practice group for more information.