As more and more purchases are online and more small businesses have an online presence, sales tax has become an increasingly hot issue. A SCOTUS ruling has just made it hotter.
Online sales tax regulations, from the vendor standpoint, have often been described as being as clear as mud. Do you, as a vendor, have to collect sales tax for sales in states in which you do not have a physical presence? The Supreme Court weighed in on this matter in Quill Corp. v. North Dakota in 1992. That ruling essentially said that vendors whose primary contact within a given state was via “common carrier or …the mail” were exempt from sales tax requirements in those states. Well, in June 2018, the SCOTUS changed its mind.
In a ruling handed down in South Dakota v. Wayfair, the Court found in favor of a state law requiring out-of-state vendors to collect sales tax on purchases made in South Dakota if the vendor sold over $100,000 in goods or services within the state or had 200 or more transactions per year. This new law of the land opened the doors for other states to do the same.
This has been a hot issue, understandably so. States want the “missing revenue,” while vendors prefer avoiding the hassle and extra work involved in collecting sales tax. Several states were already addressing this issue in their own courts and legislatures. These efforts were put on hold pending the Wayfair ruling.
Effective January 2019, 21 states enacted “economic nexus” laws, meaning that a physical presence isn’t required in order to mandate that vendors collect sales tax. They are: Alabama, Hawaii, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, Nevada, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin. The threshold figure for annual sales in these states varies from $10,000 to $500,000. Vendors should check each states’ requirements.
Wayfair’s impact on smaller vendors is negligible unless they meet the states’ sales thresholds. Once they cross that financial line however, the impact becomes greater and so must their efforts at compliance. There are many automated approaches to this task, such as QuickBooks by Intuit, which promises to be compliant and whose team is continually monitoring the issue.
Intuit recently did a small business survey that showed 1 in 5 business owners are “very concerned” about Wayfair’s impact on their operations. Regarding their confidence level pertaining to their sales tax calculations, 1 in 10 (8.2%) responded that they were not at all confident, while 1 in 2 (55.83%) said they were very confident.
In an effort to help vendors, Intuit has released a free QuickBooks Sales Tax Calculator that provides custom sales tax rates broken down by city, county, and state.
At this time, Congress has not approached the subject of a federal mandate regarding this issue. That may change in the future, but for now, it’s up to the states. Given what’s already happened, we will likely see more states enacting “economic nexus” laws.