If your business makes sales to out-of-state buyers, do you need to collect state sales tax? Until recently, Supreme Court decisions from the 20th century declared that would not necessarily be the case.

Example

First North Co based in Virginia sells wedding stationary to a customer living in Wyoming for $200. Assuming First North Co has no employees or property in Wyoming, First North Co would not be required to collect Wyoming sales tax on the $200 purchase price since the business does not have a “physical presence” in the state.

This made life for online sellers much easier. It also put in-state brick and mortar retailers at a significant disadvantage since they typically are required to collect and remit sales tax on all sales.

However, in 2018, the Supreme Court finally caught up with the times. The 20th century reasoning of the physical presence requirement did not recognize the realities of the 21st century we live in. In South Dakota v. Wayfair, Inc. in June of 2018, the Court held that the physical presence requirement no longer applied, paving the way for enforcement of a South Dakota law that requires many “remote” sellers to collect applicable sales tax on purchases by South Dakota residents.

The majority in the Wayfair decision point to some favorable aspects of the South Dakota law. For one, it applies only to remote sellers with at least 200 transactions or $100,000 in revenue from South Dakota buyers in a calendar year. Therefore, a company that occasionally ships a few moderately priced items across state lines doesn’t have to deal with all the sales tax rules pertaining to South Dakota buyers and collect the tax and remit to the state.

In addition, South Dakota is a party to the Streamlined Sales and Use Tax Agreement, which reportedly has 24 member states. This agreement, designed to standardize taxes in order to reduce administrative and compliance costs, provides sellers access to sales tax administration software.

Going Forward

After this Supreme Court decision, many states have considered new legislation that request out-of-state vendors to collect and forward sales tax, even without a physical presence in the buy’s state. However, Congress might pass a federal law addressing the issues of interstate sales tax collection.

So What Does This Mean For You?

If no federal law is passed, the focus will remain on states’ actions. Assuming that states generally follow the format of the South Dakota law, businesses that do a minimum amount of online retailing may not be greatly affected.

Conversely, small businesses that do a great deal of selling online, or plan to do so, might have to make extensive efforts to collect and forward sales tax to multiple states. If you are a large online retailer shipping products to many states, this can become an extremely complex and expensive burden.

English Please???

• In most states, if you sell products and select services to an in-state customer, you have to charge and remit sales tax on those sales to your state.
• If you sell products online to an out-of-state customer, in most cases you don’t have to charge and remit sales tax to that state unless you have a large amount of transactions or large amount of sales revenue to that state (example, over 200 transactions or over $100,000 of sales).

But here’s the thing, every state has different sales tax rates and rules… crazy right? So do yourself a favor, save yourself a huge headache each month, and work with a pro!

Candace is the founder of NewWay Accounting and is a CPA who specializes in working with fellow entrepreneurs. She strives to take the fear and anxiety out of taxes and help empower small business owners to feel more confident and in control of their finances.