Editor’s Note: This guest blog post comes courtesy of Gail Cole with Avalara.
The U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. is a game changer for online sellers and other businesses that sell across state lines.
A state can only tax a business that has nexus, a significant connection to the state. For decades, nexus was based on physical presence; efforts to tax businesses with no physical presence within a state’s borders were struck down by the United States Supreme Court, most recently in Quill Corp. v. North Dakota (1992).
But on June 21, 2018, in South Dakota v. Wayfair, Inc., the Supreme Court found the physical presence rule to be “unsound and incorrect.” It said the defendants — all large ecommerce businesses — established nexus based on their “economic and virtual contacts” with South Dakota. As a result of this ruling, physical presence is no longer the only prerequisite for nexus.
South Dakota can’t yet enforce its law: The case was sent back to state courts for further proceedings. However, other states are enforcing similar laws of their own. Hawaii, Kentucky, and Vermont asked businesses to start collecting sales tax by July 1, 2018, mere days after the Supreme Court issued its decision.
Most state economic nexus policies allow an exception for small sellers. In South Dakota, for example, a remote seller must have in the current or previous calendar year:
- Gross revenue of more than $100,000 from sales of tangible personal property, electronically-transferred products, or services delivered into South Dakota; or
- 200 or more separate transactions of tangible personal property, electronically-transferred products, or services delivered into South Dakota.
Some states, such as Connecticut, may also require the systematic solicitation of sales into the state.
This is a big deal for states, many of which have watched their sales tax revenue decline as sales by non-collecting internet sellers have risen. Close to 20 states had economic nexus laws on the books prior to the decision in Wayfair, and South Dakota’s recent victory is inspiring more to consider adopting it.
This means businesses need to be extra vigilant. If you make sales into a state or states where you don’t already collect and remit sales tax, be on the lookout for new and changing sales tax laws.
For a list of states with South Dakota-style economic nexus laws, check out this blog.
Avalara helps businesses of all sizes achieve compliance with transactional taxes, including sales and use, VAT, excise, communications, and other tax types. The company delivers comprehensive, automated, cloud-based solutions that are designed to be fast, accurate, and easy to use.