South Dakota v. Wayfair, Inc. – New Tax Rules For Online Retailer

South Dakota v. Wayfair, Inc. – New Internet Sales Ruling Will Have a Huge Impact for the Online Retailer

In South Dakota v. Wayfair, Inc., the Supreme Court was asked to decide whether a South Dakota law that required out-of-state sellers, particularly an online retailer, to collect and remit sales tax if they sold more than $100,000.00 of goods or conducted 200 or more transactions in the state was Constitutional. The Supreme Court determined that it was. This ruling uprooted over 25 years of legal analysis and has online retail sellers scrambling to figure out the ‘next step.’ This article explores the history of the issue, outline future concerns, and provides common sense next steps every online retail seller should take to protect their business.

History:

Prior rulings by the Supreme Court required a seller of goods to have a “substantial nexus” with the taxing state in order to be taxed. Without getting into specifics, that nexus typically required there to be some sort of physical presence in the state. Often times, this physical presence was an employee, stock, or a warehouse. Since many online retailers have physical addresses in one, or a handful of states, other states were losing tax revenues when their citizens purchase from online vendors. To combat this loss, South Dakota, like many other states, enacted tax laws that forced online sellers to collect and remit sales taxes.

For the last several years, some states have zealously pursued out-of-state vendors that violated their state laws. Unfortunately for retailers, prior Supreme Court rulings made it impossible to know whether these states had the legal authority to actually pursue those claims. As such, each company had to conduct a cost/benefit analysis on whether or not to comply. Those companies that chose not to comply were essentially awaiting the result of this ruling. For now, it is at least clear that the South Dakota law is Constitutional.

Future Concerns:

The Supreme Court delivered a very short opinion in this case. It answered the sole question of whether South Dakota’s law was Constitutional, as applied, and left little room for additional analysis when it comes to other state’s laws. One glaringly obvious issue is whether other state’s laws that do not have a total dollar or number of transactions requirement are equally Constitutional. In the opinion, Justice Kennedy acknowledges the plight of startups and small businesses that benefit from the physical presence requirement. But, rather than explore this issue, Justice Kennedy simply states, “South Dakota affords small merchants a reasonable degree of protection.”

It is unclear whether a state’s law that requires every out-of-state seller to collect and remit sales tax, regardless of the total dollar amount or transaction amount, is Constitutional. Or if not, what the Supreme Court would consider a “reasonable degree of protection.”

Next Steps:

Online retailers should speak with their accountants and business lawyers as soon as possible. Even if you do not sell $100,000 worth of goods or complete 200+ transactions in South Dakota, it is important to know other states’ requirements. For example, what if you are an FBA seller on Amazon, does that change how or whether you are required to collect and remit taxes? Quick tip: being an FBA seller will change your ‘nexus’ with most states that have an Amazon warehouse.

Conclusion:

The Supreme Court just gave states the green light to enact and enforce sales tax regulations that will impact online retail sellers. Just how far a state can go under this new nexus analysis is not clear. However, if you are an online retailer, it is highly recommended you consult your attorney and accounting team to know your rights and responsibilities. Feel free to contact us, here, if you have additional questions.