On June 21, 2018, the United States Supreme Court issued its opinion regarding collection of sales tax in South Dakota v. Wayfair, Inc., et al. We recently posted this article about the decision on our Facebook page.
Each state enacts its own sales tax laws, and the laws vary greatly. This article, published before the Wayfair decision, includes a great map of the current laws of each state. This map will likely change substantially in light of the Wayfair decision. Here’s what we know today and our predictions for the future.
The Wayfair Decision & Why It Matters to Your Business
Wayfair upheld a South Dakota law that requires out-of-state sellers to collect and remit sales tax as if those sellers had a physical presence in the state (even if, like Wayfair, they did not). The South Dakota law applies only to sellers that annually: (1) deliver more than $100,000 of goods and services in the state; or (2) engage in 200 or more separate transactions for the delivery of goods or services in the state. Existing law required a “physical presence” in a state before the seller had to collect sales taxes.
South Dakota, like Texas, does not impose state income tax. The state relies heavily on sales and use taxes for revenue to fund state services. It enacted the law to make up for the estimated $48-$58 million in taxes it lost per year. One justification for the law is the state’s inability to collect these sales taxes from online retailers like Wayfair.
Wayfair does not have employees or real estate in South Dakota. It sold items within the state valued well in excess of the $100,000 minimum. However, Wayfair did not collect South Dakota sales tax. Wayfair and other online retailers decided to challenge the South Dakota law.
The “Physical Presence” Rule is Eliminated for Sales Tax Collection
The question addressed is not whether South Dakota is authorized to collect the sales taxes. It can. However, consumers typically do not remit sales tax as required. Rather, the question is whether the state may require a business without a physical presence in the state to collect the taxes from in-state consumers.
In upholding South Dakota’s law, the court noted the following critiques about the physical presence rule:
- It is a “judicially created tax shelter” for online businesses without a physical presence in a state.
- The rule is far removed from the economic reality (i.e., e-commerce) of today.
- It results in significant revenue losses for the states. Consumers do not routinely remit sales tax, so the online businesses get to offer “lower prices” by virtue of not charging sales tax.
- The rule provides an incentive for businesses to avoid setting up storefronts, warehouses or offices in a state.
- E-commerce is growing at a rate four times faster than traditional retail, and this rate will likely increase.
The Court Rejects the Argument that the Physical Presence Rule is Necessary to Protect Small Businesses & Start-ups
Wayfair argued that the physical presence rule assists small businesses and start-ups to use the Internet to grow their businesses. They argued that collecting and remitting sales taxes in 50 different states creates a difficult undertaking for small businesses.
The Court rejected this argument to uphold the physical presence rule. The Court acknowledged the concern, but noted:
- Software will likely become available at a reasonable cost to assist small businesses in collecting and remitting state sales taxes.
- Congress can legislate and address this problem if necessary.
The Court appears to guide state legislatures in drafting future laws. It noted South Dakota’s law “afforded small merchants a reasonable degree of protection.” For example, the law required only businesses that (1) deliver more than $100,000 of goods and services in the state; or (2) engage in 200 or more separate transactions for the delivery of goods or services in the state to collect and remit sales taxes.
What Does Wayfair Mean to Online Businesses Selling to Consumers in Texas?
Is your business required to collect Texas sales tax? Currently, it depends on your business’ physical presence in the state.
Businesses with a Physical Presence in Texas
The Texas Comptroller’s Office website states that “[i]f you live in Texas, sell more than two taxable items in a 12-month period and ship or deliver those items to customers in Texas, you are required by law to have a Texas sales tax permit.” To determine if your business sells “taxable items,” click here.
Businesses without a Physical Presence in Texas
According to the Texas Comptroller’s Office, “[a]n out-of-state seller is not required to collect Texas tax if the seller only conducts business in Texas from out-of-state by mail, telephone, or via the Internet, but this seller can choose to apply for a permit and voluntarily collect Texas tax from its Texas customers.” If the seller does not collect these taxes, the consumer’s must remit the taxes to the state by filing this form. However, most consumers do not make this filing.
Will Texas Sales Tax Law Change in Light of the Wayfair Decision?
Probably. This article estimates that Texas loses $1.1 billion in uncollected sales tax each year. It’s hard to imagine that the Texas legislature won’t change the laws, especially when the tax changes affect sellers from outside the state, rather than Texas-based businesses (and voters).
Technically, Texas consumers are obligated to remit sales tax to the state. Obviously that is not happening. Sales tax revenue would likely increase substantially if Texas law makes out-of-state sellers responsible for remitting sales taxes on online sales in Texas.
If you have a physical presence in Texas and you’re selling two or more taxable items online or in person to Texas consumers, you should already be collecting and remitting sales taxes. However, if you’re selling goods online to consumers outside of Texas, you need to research and follow the law of the state in which you are selling. Here is a great resource that provides information for each state.
In the next few years, we’ll likely see law changes in most states requiring online retailers to collect sales taxes. (On a side note, to avoid a common business mistake, be sure to budget for this potential change in the law by planning for things like a software purchase, accounting services, employee time, etc.) These laws will likely vary from state to state. The real question is whether Congress will step in and provide guidance to assist with uniformity in state laws.
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