The potential for a whole new tax era is upon us with the Supreme Court ruling of South Dakota vs. Wayfair, Inc. also known as the “Wayfair Decision”. The 5-4 ruling overturned a previous decision and law that has prevailed since 1992, known as Quill, which established that state governments can only tax businesses who have a physical presence in the state. Quill no longer makes sense in the ever evolving nature of business in this technology driven interconnected economy, especially when goods and services can be both tangible and digital, sold online and transferred across borders instantly.
Sales tax is currently the second largest revenue source for both state and local governments. Sales tax was first enacted less than 100 years ago around 1921 in West Virginia, by the start of WWII 30 states had imposed a sales tax on goods. As of today there are only 5 states that don’t impose a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. U.S. Sales tax code has always been a confusing mess, especially with over 10,000 tax jurisdictions. With this development, tax laws could potentially simplify over time for online retailers. Before the Wayfair decision, 45 states and their local governments lose up to $33 billion annually, because they don’t tax remote sellers. Now states can begin taxing remote retailers and recouping that revenue.
There are two main problems that the Supreme Court sought to solve in the Wayfair decision. The first being the states are missing out on a big chunk of change, because the laws are out of date. Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states. The issue has to do with online sellers being tax free giving them an unfair advantage. The physical presence rule puts businesses with a physical presence in a state at a competitive disadvantage to remote sellers. With physical presence no longer being the standard, states can now tax remote, online sellers.
Small business owners feared the ruling on the Wayfair Decision, not knowing how they can manage complying with thousands of state and local tax policies across the US, wondering how they would survive these new tax laws. Thankfully, the issue of compliance for small businesses was considered by the Supreme Court when the specific thresholds that resulted from the South Dakota economic nexus standard were determined. State and local governments cannot tax just any remote merchant. This restriction provides a protection for small businesses who do not meet the thresholds for sales and transactions.
It is likely that most large businesses will not notice much of an impact because of the scale of their businesses and volume of products sold out of their home state. Most fear the small merchants will really suffer but if they don’t reach the benchmarks then they might not be affected at all. Those who might feel the hit the most are the medium sized businesses. They will have to track tax law changes while tracking their own sales volume in each jurisdiction, then collecting and paying sales tax when needed.
The thresholds for sales in each state is constantly changing. It’s imperative to have a good understanding of this new sales tax law. Smoker & Company has a Tax Attorney on staff, who will gladly answer any questions on the subject.