This article is written by our friends at TaxJar.
3 Sales Tax Lessons from the South Dakota v. Wayfair Supreme Court Ruling
The Supreme Court’s 2018 South Dakota v. Wayfair decision completely changed the sales tax landscape for eCommerce businesses. As a result of laws passed after the decision, more businesses are required to collect sales tax in more states. This has, understandably, generated confusion for online businesses who are suddenly facing new tax obligations.
What exactly was South Dakota v. Wayfair? And how does it actually impact you?
Recap: What did South Dakota v. Wayfair mean for eCommerce businesses?
To make a complex topic simple, this Supreme Court decision ruled in favor of states who wanted to expand the definition of “sales tax nexus.” If a business has nexus in a state, it is required to collect sales tax when selling to buyers in that state. With Wayfair as the new law of the land, states are now constitutionally allowed to pass laws that an online business with “economic nexus” in the state is required to collect sales tax in that state.
All 46 US states with a sales tax are allowed to make their own sales tax rules and laws. But in general, when a state passes an economic nexus law, they can declare that an online business is required to collect that state’s sales tax if they meet certain criteria. This is generally when the eCommerce business:
Makes over a certain number of individual sales transactions in the state
Grosses over a certain dollar amount of revenue in a state over a set period
Each state is allowed to set their own economic nexus threshold, so there is no set sales or transaction number that creates economic nexus in every single state. However, the majority of states set the sales threshold at over $100,000 in revenue in the state and over 200 transactions with buyers in the state.
For eCommerce businesses, this has meant a whole new sales tax education. Here are the top three lessons the Supreme Court has taught eCommerce businesses.
Lesson 1: Understand your sales volume in each state
The immediate lesson from Wayfair was that eCommerce businesses will now have to be aware of their sales volume in every US state.
Before Wayfair, online businesses only had to know where they had some sort of physical presence, such as an office, employee, or inventory in a warehouse. This is, of course, fairly easy to track.
But now, sellers need to understand each state’s economic sales tax law and what to do when, or if, they are responsible for sales tax collection in that state.
When your business becomes responsible for collecting sales tax in a new state, you must:
Register for a sales tax permit
Set up sales tax collection from buyers in that state on all shopping carts and marketplaces
Periodically file and remit sales tax collected to the state
Now that nearly every US state with a sales tax has an economic nexus law, more eCommerce businesses than ever are responsible for collecting sales tax.
Lesson 2: Understand the taxability of the products your business sells
While most “tangible personal property” is taxable, each state makes some exceptions to the rule.
Many states allow low or no tax on necessities like clothing or groceries. Or in some cases, special interests have negotiated a sales tax break on certain items that are vital to that state’s economy. Also, some states catch up with the times and begin taxing “new” technology, such as software-as-a-service or digital media downloads.
To complicate matters, some states only require sales tax on items that cost more than a certain amount. For example, in New York state, clothing that sells less than $110 per item is not subject to New York state’s 4% sales tax. But clothing that sells for $110 or more per item is taxable. And to make matters more complicated, some local counties, cities, and special taxing districts in New York still consider all clothing taxable no matter it’s sale price. As you can see, it can be difficult to determine when to collect sales tax and how much to collect.
The US has over 14,000 taxing jurisdictions and the various states combined have over 3,000 different instances of unique product taxability. Multiply that by all the SKUs and online business sales and there are near infinite combinations of product taxability. As sellers attain sales tax nexus in more states, it’s vital that they understand where and how their products are taxable.
Lesson 3: Sales tax law can change at any moment
Many eCommerce businesses were caught by surprise when the Supreme Court ruled in favor of South Dakota in the Wayfair decision. But big sweeping Supreme Court cases don’t come along often. Rather, it’s the forty-six US states with a sales tax that online sellers really need to keep an eye on.
Passing economic nexus laws are just one way state law changes can be frustrating for sellers. Other ever-changing state laws include:
What types of presence create sales tax nexus in a state - Economic nexus is the splashy news, but states are constantly on the lookout for ways they can require more businesses to collect sales tax. For example, many states have passed “Marketplace Facilitator Laws” that require big online marketplaces like Amazon and eBay to collect sales tax on behalf of 3rd party sellers who sell on their platform.
State and local tax rates - States and local jurisdictions rely on sales tax to fund vital budget items like schools and roads. As the economy shifts, states may choose to raise or lower tax rates. For instance, a local jurisdiction may add a 1% sales tax to fund a new school. This means that online sellers need to ensure that they begin collecting this new tax when selling to a buyer who lives in that district.
Product taxability - As political climates change, states change laws on what is and what isn’t taxable. An item that was once untaxed may, with the stroke of a governor’s pen, now be taxed, or vice versa.
How often eCommerce businesses are required to file and remit sales tax – States are also constantly tweaking administrative rules. Generally, as your business grows and collects more sales tax, states will require that you file sales tax more often. Fortunately, in this instance, your state will inform you if your sales tax filing schedule has changed.
How to automate sales tax
We get it. Sales tax is complicated. And worse, it isn’t even a profit center for your business—it’s just a taxing administrative obligation.
That’s why we suggest sales tax automation. Sales tax automation allows you to know where your business has nexus or is approaching economic nexus thresholds, collect the right amount of sales tax on all of your products, and file and remit your sales tax returns automatically. Automation cuts through the noise of 14,000 taxing jurisdictions and allows you to feel secure that you have sales tax handled.
Still want to manage sales tax manually? Then check out TaxJar’s Sales Tax Checklist.