The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair overturned the long-standing precedent that prevented states from collecting sales taxes from online and remote sellers unless they had a physical presence in the state.
Instead, the court, under Wayfair, introduced an economic nexus test based on the sellers’ sales volume into each state. States may now impose sales-tax collection obligations on online and remote sellers that conduct more than $100,000 in sales or more than 200 transactions in their jurisdictions in a given year, regardless of whether the sellers have a physical presence in the state. This economic nexus standard varies by state.
The ruling has significantly expanded states’ authority in the sales tax arena, and businesses in every state will likely be impacted.
When an online or remote seller surpasses a state’s threshold, the seller has an obligation to collect and remit sales tax in that state. These rules apply to any business that meets an economic nexus threshold. If a business sells product into jurisdictions outside its home state, that business needs to understand which activities will trigger obligations in the destination states.
What this means for businesses
This decision could potentially impact any business that sells goods remotely. Companies could be required to collect and remit sales tax in up to 45 states. States are responding by enacting new rules and regulations. South Dakota is relatively straightforward while other states are more complex.
What happens if a business does not comply?
The state jurisdiction will hold the online and remote seller accountable for the taxes owed. If the state notifies the online or remote seller of an obligation and the transaction has already been completed, most sellers won’t be able to collect from their customers.
The state jurisdiction can impose penalties and interest. These penalties may be significant, depending on how long the business has operated without collecting the taxes.
There are ways to potentially get the penalties waived, but will be on a case-by-case basis depending on the facts. The real challenge is choosing the best path to minimize past exposure and collect tax from customers going forward.
What to do next
If an online or remote business has sales to customers outside its home state, the seller needs to understand the taxability of its sales by jurisdiction and will need to make the decision on when, where, and how to become compliant. It may be advantageous to register through a state’s voluntary disclosure program. By using the voluntary disclosure program, it is possible to minimize past exposure.
If it is determined that the business has reached the economic nexus threshold in a jurisdiction, the business must comply with that jurisdiction sales tax requirements.
The impact of Wayfair will have a ripple effect on business. To discuss your specific situation or to see if you have a sales tax obligation in other states, please contact your Alerding CPA Group team member. We have the resources to help you navigate this complex issue.