For years, eCommerce flourished without the added complication of sales tax due to a court case in 1992, Quill Company v North Dakota. The decision in that case set a nexus for interstate sales that required the physical presence of a business in order for a state to collect sales tax from them. While consumers were expected to pay use taxes on items that were purchased without tax, this was not enforced and most consumers never even realized this rule existed.
In 2018, another case came before the US Supreme Court dealing with interstate sales. In Wayfair v South Dakota, the court overturned part of the precedent set in Quill by determining that a state could set an economic nexus (instead of a physical one) to determine whether a business was required to collect sales tax.
What does the decision mean exactly?
It means that companies selling a certain amount in a state may now be required to pay sales tax even if they don’t have a physical presence in that state. Since every state has different tax laws, they each needed to pass their own law for this to take effect. Most states have now passed these laws, and several are already in effect.
How do you know when you have to collect sales tax?
As mentioned, each state has its own rules for their economic nexus. Five states have no sales tax. Of the remaining 45 plus Washington, D.C., only 4 have not passed laws requiring collection of sales tax yet. While most states set a threshold of $100,000 in sales or 200 transactions in the state annually, there are a few states with thresholds as low as $10,000 or 100 transactions. This chart shows which states have enacted laws, what their thresholds are, and when their enforcement dates are.
So what do I have to do?
That depends on how you sell your products. Many states already require online marketplaces to collect sales tax for the businesses that sell on their sites. Some platforms also provide easy assistance with adding sales tax for each state. If you sell on your own site, it may be time to invest in a tax assistance or bookkeeping software that helps collect these fees at the time of checkout or determine it for invoices.
What happens if I don’t collect sales tax?
Because every state has its own law, you could be opening yourself up to multiple fines, lawsuits, and injunctions against your business. Some states have a grace period to put systems in place to collect taxes moving forward or have not fully implemented their laws yet. Others will expect you to be compliant right now. Enforcement will vary from state to state, but you may face severe penalties for failing to meet the requirements. It’s in your best interest to talk to a tax professional to ensure you are compliant with each law.
How can I learn more?
LexisNexis has a great article on the results of this decision with valuable information about the legal terms and the case's impact on eCommerce. If you use an eCommerce platform or marketplace, they likely have additional resources to help you determine whether or not you are in compliance with all key laws. Avalara also has resources concerning not just economic nexus in each state, but the other ways states may require tax as well. You’ll also want to keep your eye out in the future for movement on several proposals in Congress to simplify sales tax by making it federal instead of state-by-state.