In June 2018, the Supreme Court ruled that states can require e-commerce companies to collect and pay sales tax, even for areas where they don’t have a physical presence. Here’s the good news — analysts speculate that the change will not alter shopping habits. Online shopping is so convenient that most shoppers won’t blink about having to pay local sales tax on their purchases. But here’s the downside — if you run an online store, the new ruling may make your life harder or at least complicate your accounting.
The New Rule
The ruling doesn’t explicitly say that you have to collect sales tax from all your customers. Instead, states and local jurisdictions can make laws requiring you to collect sales tax. For instance, if Wisconsin passes legislation that you have to collect sales tax for that state, you need to assess sales tax on every purchase made by shoppers in Wisconsin, and then, you have to remit the sales tax payments to the department of revenue in that state.
Theoretically, however, you don’t have to collect and remit sales tax for states that don’t have the law on the books. But most states will be implementing these laws soon. In fact, state legislators were waiting for this ruling, and as of April 2017, at least 20 states had these laws written and ready to roll out.
The History of E-commerce and Sales Tax
Historically, online stores did not have to collect sales tax. A ruling from the 1992 Supreme Court case Quill Corp. v. North Dakota determined this practice. At that time, the internet was relatively new, and most people were not using it on a daily basis. As a result, the ruling applied more to mail order catalogs than it did to online stores. It also stated that businesses did not have to collect sales tax unless they had a physical presence in a specific state.
The issue was relatively quiet for nearly 20 years, but in 2010, Colorado passed a law requiring vendors based out of state to collect information on sales made to residents of Colorado, and the Direct Marketing Association filed suit. The case (Direct Marketing Ass’n v. Brohl) moved back and forth through several layers of the court system until both parties settled. During that process, Justice Anthony Kennedy noted the “tenuous nature” of the Quill ruling. That served as an implicit invitation for states to write laws that would threaten Quill.
Wayfair Versus South Dakota
South Dakota drafted a “kill Quill” law, with the caveat that it applies only if the courts ruled it constitutional. Then, the state sent a demand letter to Wayfair, Overstock.com, Newegg, and Systemax. Systemax naturally started collecting and paying sales tax, but the other companies refused, citing Quill. Ultimately, the case went all the way to the Supreme Court, which ruled in favor of South Dakota.
The court stated that the internet changed the concept of economic nexus (taxable activities of interest to a state). As explained previously, in the past, a business needed a physical presence to collect and pay sales tax. However, with e-commerce accounting for 12% of total retail sales, and with it growing by 10% every year, the Supreme court had to revisit the issue. With no sales tax being assessed, states are losing between $8 billion and $33 billion annually, and as a result of those losses, they have a justifiable tax interest in internet sales.
What Does the Supreme Court Ruling Mean for You?
The South Dakota law only applies to businesses with over 200 transactions or more than $100,000 in sales. If you have a small Etsy store or make a few eBay sales every year, you probably don’t have to worry about collecting sales tax. Of course, however, every other state is not going to write their law in the same way, and the Supreme Court ruling is a bit vague. It merely says that regulations should protect small sellers from excessive tax collection requirements. The label “excessive” is open to a lot of interpretation.
How to Collect and Calculate Sales Taxes From Multiple Jurisdictions
To be on the safe side, you may want to collect sales tax from all your customers based on the state where you are sending the order. If you make sales through a site such as Etsy or if you use a platform such as Shopify, there’s a good chance that these companies will develop tools to calculate sales tax based on the seller’s shipping address. If you have a website, you may need to pay a developer and a licensed tax professional to do that for you.
But, whether you get help assessing sales tax or not, you’re still responsible for filling out sales tax returns for multiple states and even counties or cities in some situations. Luckily, there is software designed expressly for this purpose — check out TaxJar, AvaTax, TaxCloud, Taxify, or others. The former companies developed programs for online retailers in particular, but you need to check with each company to see if they cover all 50 states plus local jurisdictions. You may also want to consult with an accountant.
If you run an online shop and you don’t collect sales tax, you could end up with sales tax bills, late payment fees, and penalties from multiple states. To prevent that from happening, be proactive — put systems into place that make it easy to assess, track, and pay state and local sales tax. Also, keep in mind that this ruling puts you on par with brick-and-mortar stores. Shoppers who were turning to you to avoid sales tax, no longer have that option, so you may need to find new ways to be competitive.