Prior to South Dakota v. Wayfair, businesses were not required to charge, collect, and remit state and local sales tax unless they had a physical presence in that state (employees, a store, a distribution center with inventory, etc.). This originated from the Quill Case back in the days of mail-order catalogs. However, our current Internet marketplace has dramatically changed our shopping habits. Customers who purchased taxable items online but who were not charged sales tax were expected to self-assess and pay use tax on their purchases, but rarely complied. States were losing out on billions of tax dollars. The National Retail Federation wrote that “the current tax system favors online retailers over brick-and-mortar business, and undermines fair and open competition in the marketplace”.
Effective May 1, 2016 South Dakota passed legislation to require an out of state retailer to collect sales tax from a SD customer if the seller has either $100,000 in sales or 200 transactions with customers located in South Dakota. This new legislation was the opposite of current case law like Quill. South Dakota then immediately went after large online retailers like Wayfair (who hadn’t been charging SD sales tax due to lack of physical presence in SD) to accelerate this new law through the judicial system and fast track it to the U.S. Supreme Court. In this latest decision, the Supreme Court ruled 5-4 in favor of South Dakota and overturning Quill, allowing states to require out-of-state retailers selling into that state to collect sales tax without a physical presence.
What Does this Mean for You?
For Consumers of taxable items or services: You may see sales tax on invoices that were not there in the past, easing the burden of filing and paying use taxes. Effectively, you’d be charged the same sales tax regardless if you purchased a book from your local bookstore vs. a book from an online retailer.
For businesses who sell across state lines: You will likely see an increase in sales tax compliance if you sell into a state with economic nexus rules like South Dakota’s. This will increase your burden of registering, collecting, remitting, and reporting sales tax at the state and local levels if your sales meet a minimum threshold.
What to expect in the future: South Dakota has stated they are only looking forward for businesses to comply with the new rules, but it is unknown yet if other states will try to collect or audit for back taxes prior to the Wayfair decision. Also, considering South Dakota’s success, other states will likely follow suit and pass legislation with economic nexus thresholds. Each state will determine their own thresholds to create a withholding and filing requirement. Minnesota included this in the 2017 Omnibus Tax Bill, effective the earlier of the U.S. Supreme Court overturning Quill, or July 1, 2019. Their threshold is $10,000 of sales. Minnesota will be releasing guidance in the next thirty days, you can read their press release here.
While this case helps to even the playing field between traditional and online sellers, it will create a lot of burden for small businesses who will now have to research and comply with potentially hundreds of new state and local sales tax jurisdictions. What is taxable in one state may not be taxable in another, and tax rates and rules are constantly changing, making compliance extremely difficult to keep up with. This case will change the landscape of interstate sales transactions, but the scope is still unknown. Look for future guidance and legislation soon. Reach out to your tax advisor or contact us if you have questions or concerns about how this will affect your business – especially if you expect to hit those thresholds in South Dakota.