The anticipation is finally over. The Supreme Court made its decision on the South Dakota v. Wayfair case. Twenty-five years after the initial Quill Corp. v. North Dakota case that started it all, the justices decide to rule in favor of South Dakota and overturn the 1992 precedent.
States may now require internet retailers to collect sales taxes—up to billions of dollars each year. This ruling is expected to help brick-and-mortar retailers, who delivered up to $18 billion in sales tax revenue in 2017, compete with online retailers.
South Dakota had the support of 35 other states as well as industry groups that represent major retailers like Amazon, Target, and Walmart. Amazon currently collects taxes on its direct purchases, but generally did not collect sales tax on items sold through third-party vendors.
In 1992, North Dakota filed an action in state court to require Quill Corporation, an out-of-state mail-to-order retailer, to charge a North Dakota use tax on its merchandise used within the state. The state supreme court ruled in favor of Quill, believing the state’s imposition of a use tax would jeopardize interstate commerce.
From this case stemmed the precedent that states cannot require retailers to collect taxes unless the business has a physical presence in the state. Physical presence, or nexus, is established when a company has employees or service/sales agents or property, such as inventory or warehouses, located in a state.
Fast forward 25 years later, South Dakota has now finished what North Dakota started. In 2016, South Dakota passed an economic nexus law that would require remote sellers (i.e., sellers with no physical presence) to collect sales tax if they have $100,000 or more in revenue or made 200 individual sales in the previous calendar year. Following this law, Wayfair, Overstock.com, and Newegg contested South Dakota’s authority to collect taxes, previously winning in the lower courts.
In April of this year, South Dakota asked US Supreme Court Justices to overturn the 1992 precedent requiring businesses to establish nexus before charging sales tax. South Dakota is one of only nine states that does not collect state income taxes, causing the state to be more reliant on its revenue from sales tax. South Dakota projects it loses around $50 million annually from sales tax not collect from online ecommerce, compared to $13.4 billion total in the US.
How do I respond to the South Dakota win?
First, understand your current nexus footprint. You should know:
- Where your employees and sales team are conducting businesses
- What activities they are performing in each state
- The locations of your inventory
- Your annual revenue and the number of sales you make in each state
- Where you currently collect sales tax
- The type of products you sell
Knowing the type of products you sell will help you navigate the sales tax exemption rules, especially the ones that are out of the norm. For example, in Texas deodorant is taxable but not antiperspirant. In Minnesota, blankets are taxable unless a baby is receiving the blanket. In Illinois, a candy with flour cannot be taxed.
As a result of the overturned 1992 precedent, physical presence will no longer be required to collect and file sales tax. While the Supreme Court only observed South Dakota’s law, expect other states to adopt their own nexus rules quickly.
Ecommerce retailers need to start working with the appropriate resources to determine if they retroactively have any sales tax liability. Next, they need to acquire services and technologies that allow them to track, calculate, and collect appropriate sales tax in each state. Due to the complex nature of state sales tax, having an automated system for sales tax compliance will be essential.
In a recent article, Scott Peterson, VP of US Tax Policy and Government Relations for Avalara, says, “Online retailers that want to face the future with confidence – and ensure their ability to focus on satisfying the needs of customers – should immediately develop a reliable strategy for tracking evolving sales tax regulations, assessing their impact on their businesses, and automating sales tax compliance.”
If your commerce platform does not support state tax calculations and compliance, several third-party vendors will connect to the platform. For example, Avalara automates sales and use tax compliance so retailers don’t have to worry about the ever-changing state rule changes. Avalara’s cloud-based solution quickly calculates the sales and use tax in your shopping cart or invoicing system based on the user’s address and cross-checks the rates with thousands of rules and jurisdictional boundaries to ensure accuracy. Every company transaction runs through its system, but Avalara only charges per transaction in nexus states.
Prior to the ruling, a recent survey found that 72% of retailers believe online merchants should not be required to collect sales tax in states they do not have a physical presence and 69% believe the law requiring them to collect sales tax from consumers nationwide would have a negative impact on their business.
Keep in mind, 31 states already have laws in place to require internet retailers to collect sales taxes—these states will likely be reviewing their versions to see if they could hold up in court.