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In the summer of 2018, South Dakota v. Wayfair made its way to the Supreme Court. This case, in part, challenged the grounds of a previously decided Supreme Court case, Quill Corp. v. North Dakota (1992), where physical presence nexus was established for sales tax purposes. This meant that the primary way to determine if a business should collect and remit sales tax to a state was if it had some form of physical presence in that state whether it be property, inventory, or employees. As a result, large internet retailers have avoided having to collect and remit sales tax in states where they have no physical nexus, causing states to lose millions in sales tax revenues each year. South Dakota estimated that it lost roughly $48 to $58 million annually as a result of the physical presence standard. After a close 5-4 decision, the Supreme Court ultimately ruled in favor of South Dakota, thus overturning its previous physical nexus standard and allowing South Dakota to implement the new “economic nexus” standard.
In efforts to tax online, out-of-state retail giants, South Dakota’s legislature enacted a law that required out-of-state sellers to collect and remit sales tax. This law was viable if they delivered at least $100,000 of goods or services into the state or engaged in 200 or more separate transactions for deliveries or services into the state. This kept an undue burden off the local mom-and-pop stores. However, if one of the larger online retail giants passed either of the standards, they were deemed to be economically present and must collect and remit. This new concept of economic presence set the precedent for many other states who would, in turn, adopt similar thresholds for online out-of-state retailers conducting business in their states.
Although beneficial to states from a revenue standpoint, four justices concluded that the Court may have wrongfully decided on this opinion, therefore bypassing the opportunity to further close on other various state sales tax variables. They believe that Congress is now faced with conjuring further solutions to help simplify and regulate interstate commerce. Two other viable paths have been considered: the Remote Transactions Parity Act (RTPA) and/or the Marketplace Fairness Act (MFA). These two options command that states either have to simplify their sales tax laws or make sales tax a business obligation rather than a consumer obligation. As a business obligation, their sales tax would be collected by the rate where the company resides but the revenue would be sent to where the consumer resides.
Even if your business is not involved with South Dakota in any way, it is critical to understand your state’s laws on taxing internet sales and how this ruling affects the other 31 states (and growing) with their similar economic nexus standards. The publicity of South Dakota’s laws evading any correction without a clear division of ethics may drive other states to push the boundaries as much as they can. Due to this ruling, if your business does not have any physical presence in a certain state, you can still be held liable for collecting and remitting sales tax in that state if you crossed their economic threshold standards.
For example, the state of Georgia mandated their annual economic nexus thresholds to $250,000 in gross sales or 200 or more separate sales for the previous or current calendar year (Sales Tax Institute). If this threshold is met by your business, you are responsible for collecting and remitting sales tax in GA.
To avoid breaking tax compliances in the states that you do business in, SME CPAs has the experts that are educated on the tax changes to keep your business from failing to comply. With the current thresholds that are being passed in many states, we don’t want you to be unaware and fall short of any state requirements that will bring you otherwise avoidable penalties and interest. We take pride in helping your business succeed and want to always keep you informed of the ever-changing tax environment.
For more information on Congress’s options:
RTPA: https://www.congress.gov/bill/115th-congress/house-bill/2193
MFA: https://www.congress.gov/bill/115th-congress/senate-bill/976