Sales Tax on Online Sales - The Impact of South Dakota vs. Wayfair
Are you aware that certain states have the authority to tax online sales?
On June 21, 2018, the US Supreme Court changed the sales tax landscape for e-commerce by issuing an opinion to overturn the physical presence test previously used as the standard for a state to impose sales tax collection and remittance for remote sellers. Businesses will no longer be able to avoid sales tax purely because they do not have a store located in the state they’re selling to. This decision will impact not only the large e-commerce giants like Amazon and eBay, but also smaller, family-owned businesses.
Sales tax laws vary from state to state, and the responsibility of knowing and complying with each state falls on each business. Currently, most states are still in the process of drafting new guidelines for online sales, however South Dakota requires sales tax to be charged if the business sells either $100,000 or 200 individual transactions within the same calendar year. The expectation is many if not all states will follow a similar format. There are currently nine states with effective online sales tax rules (Georgia, Tennessee, Indiana, Wyoming, Colorado, Alabama, Massachusetts, North Dakota and South Dakota) and another seven with legislation written but not yet effective (Illinois, Iowa, Connecticut, Hawaii, Kentucky, Vermont and Maine).
This will increase the administrative burden on all companies with sales in multiple states. More time and effort will need to be dedicated to not only knowing the laws in each state, but also collecting and remitting the tax on a monthly basis. This additional task may even require hiring new employees or assistance from outside firms. Avalara (avalara.com) is a company that provides tax automation including sales and use, global commerce, excise, etc. It operates behind the scenes, calculating, collecting, remitting and filing the required forms with the appropriate agencies and is also compatible with over 580 accounting systems, including QuickBooks.
There may be some benefit to companies with only physical locations and no online sales. Since the emergence of e-commerce, remote retailers have had an extreme advantage by not only being able to reach more consumers but also offering lower prices by not charging sales tax. The new laws will help put every retailer on a more even playing field. And since consumers will need to pay sales tax regardless, there is a potential for increased sales at local stores.
Although sales tax may now be required in a state a company sells to, the court case did not overturn the P.L. 86-272 protection from income tax. States are still not able to levy income tax if the only activity within the state is the sale of tangible property that is approved and filled outside the state.
If your company sells to outside states, this case may change the way you need to approach sales tax to remain compliant. Penalties and interest can be costly if you don’t.
Contact Us With Your Questions
If you have questions about sales tax compliance, contact our accounting professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.