Earlier today, the Supreme Court overturned its 1992 ruling that prohibited states from imposing sales tax on retailers who did not have a physical presence in the state. The ruling came in a case involving online retailer, Wayfair, who had been sued by South Dakota, which passed a law that requires out-of-state retailers to collect and remit sales tax on sales to residents in South Dakota.
Short Term Impact
Many of our clients sell products or services through their websites and have expressed concern. Our advice: Don’t panic! Today’s ruling has a narrow focus and a limited impact.
As a result of today’s ruling, South Dakota can enforce their online tax regulation, which covers only sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into South Dakota.
I don’t believe that any of our current clients do that volume of business in South Dakota.
Long Term Impact
The ruling opens the doors for all states to require online retailers to collect and remit taxes.
Large brick and mortar retailers, who view the lack of taxes on internet sales to be an unfair advantage, will be be lobbying each state to begin imposing similar regulations requiring e-commerce retailers to tax sales. States, who will see this as an opportunity to collect billions in additional taxes, won’t need much prodding to take action. We expect it won’t take long for other states pass similar regulations.
We expect that many states will exempt small e-commerce businesses, like South Dakota has done, from their internet sales tax regulations. However, we are confident that there will be considerable variability, from state to state, on who must comply.
In the long haul, online retailers with any significant volume should expect to:
- register with states that mandate that they collect sales tax
- calculate taxes and collect taxes in accordance with each state’s rules
- prepare sales tax forms for each state
- remit taxes to each state
However, until states pass new regulations, we can only surmise the impact. We’ll need to wait and see.
Today’s Supreme Court ruling affects only large e-commerce vendors who sell to residents in South Dakota. However, it opens the doors for each state to force online retailers to collect and remit taxes — and that has the potential to increase the cost of doing business for anyone selling products online.
We are hopeful that legislators in each state will understand the burden this creates for entrepreneurs who sell small volumes of products through their websites — and exempt them. If not, the cost of compliance will force many small online retailers to modify their websites to prevent sales transactions to residents of those states.