Sales Tax Law Changes for On-line Retailers

SPECIAL BULLETIN - Attention on-line sellers!

In case you haven’t been paying attention, South Dakota v. Wayfair was settled last week and the implications are critical for on-line retailers.

A very close and dear friend of ours, Hal Shapiro, Vice President, Tax Planning, Bed Bath & Beyond, shared the following important information.

Last week in a 5 to 4 ruling the Supreme Court held that states have the right to impose sales tax collection requirements on out of state sellers who ship or deliver taxable goods into a state even if the seller does not maintain a physical presence in the state of delivery. This ruling overturned nearly 50 years of precedent which had stipulated that an out of state seller needed to have physical presence in a state before that state could impose its sales tax collection rules.

Previously the Court ruled that having a physical presence in a state was required to create the substantial nexus which allowed the enforcement of sales tax collection rules on an out of state seller. The Court had also previously asked Congress to legislate this issue. Following last week’s decision having a substantial virtual connection to a state appears to fulfill the concept of substantial nexus.

In the 26 years since the last sales tax case before the Court, Congress has not acted on this issue and many states began arguing that the expansive growth of online commerce was putting their local merchants at a competitive pricing disadvantage compared to the out of state sellers who were not legally obligated to collect sales tax. In addition, the states themselves have less money in their coffers due to decreasing annual sales tax collections as their citizens increased their volume of online spending.

Following the Wayfair decision it is expected that most, if not all of the 45 states which impose sales taxes will begin to impose some form of sales tax collection obligation on out of state vendors. For example, South Dakota, the plaintiff in the Wayfair case, already has a law (enforceable as of last week) requiring sales tax collection and remittance by any entity with annual sales in the state in excess of $100,000 or 200 separate transactions. There are 16 other states that have similar threshold rules and 5 additional states that do not set any threshold before requiring sales tax collection. All were awaiting the Wayfair decision before deciding if, how and when to begin implementing their respective laws. Additionally, Congress could take up the issue and legislatively establish a uniform definition of what constitutes sales tax nexus although this seems unlikely, especially in a midterm election year.

So, what does all this mean?

If you are an out of state seller at some point in time you will likely be impacted by this ruling and will ultimately be required to register for, calculate, invoice and collect the proper tax on the items you sell and be obligated to remit those collected dollars timely to all of the proper jurisdictions. Keep in mind that there are 1000’s sales tax rates and that not all states, counties, cities and special jurisdictions tax all items at the same rate and in a similar manner, even within the same state. Noncompliance, charging incorrect tax rates, improper taxing of items, and delinquent filing or payment of sales taxes often result in penalty assessments. Many small and medium size businesses currently do not have the in house expertise or technological capabilities to meet the impending requirements.

Have questions? Here's what you can do.

While this issue is far from settled, if you believe that this change could impact your business it is advisable that you monitor the changing sales tax laws in those states into which you ship taxable goods and consult your tax advisor regarding how to become compliant with the collection and remittance obligations that are likely headed your way.

Twelve Oaks Advisors recommends you have a conversation with your accountant and/or tax advisor soon and begin planning for the inevitable system, process and marketing changes that will be required to comply with the ruling and inevitable changes in your local tax codes. Although we are not tax experts, we are experts in change management and can help you plan and prepare for the future.

Again, thanks to our friend, Hal Shapiro, for sharing this important information.