Decided on June 2018, South Dakota v Wayfair ruling has the power to change the e-commerce landscape in several ways. In this case, the Supreme Court ruled states have the authority to require e-commerce companies to collect sales tax. While the exact rules are not completely clear or set in stone yet, here is a look at the case, the history of e-commerce sales tax collection, and what you need to know if you run an e-commerce business. Read on to find out more!
In this article:
- The South Dakota v Wayfair Ruling
- State Laws on Sales Tax
- The History of Sales Tax and E-commerce
- Kill Quill
- What You Need to Know
South Dakota v Wayfair | How Can It Affect E-Commerce Businesses and Sales Tax?
The South Dakota v Wayfair Ruling
When it comes to South Dakota vs Wayfair, the Supreme Court ruling does not expressly dictate sellers have to collect sales tax on their e-commerce sales. Rather, it paves the way for states to make and enforce laws related to e-commerce companies and sales tax.
State or local governments have been waiting for this ruling for a long time. In fact, over 20 of them have laws written and ready to roll out.
If you are one of the online retailers, be ready to collect sales tax once the laws become official. You can also start collecting sales tax in every state even if it is not legally required yet. As an example, the e-commerce giant Amazon is already on it in all states that have sales tax.
To understand this ruling, know that sales tax is applied at the place of supply. If you live in South Carolina and sell something to someone in South Dakota, you apply South Dakota sales tax to the sale.
However, when it’s time to pay the income tax, you pay it on your profits based on the state where you live. That has not changed.
State Laws on Sales Tax
As indicated above, South Dakota v Wayfair did not make a law on state sales tax. It just allows states to make their own laws. The federal government has this right due to the intrastate commerce clause.
The clause is outlined in Article 1, Section 8, Clause 3 of the US Constitution. It also applies to commerce between the states as well as to a variety of other types of economic activity.
In South Dakota, the law only applies to certain e-commerce companies. These are companies with over $100,000 in sales or over 200 transactions per year. It means Internet retailers that run small businesses may not have to worry about collecting sales tax.
However, as additional states roll out their laws, you should pay attention to the particulars to see if your business is affected. The thresholds may not be this generous in a lot of other states.
The History of Sales Tax and E-commerce
In the past, only businesses with a physical presence (substantial nexus) in a state had to collect sales tax. Therefore, if you were not based in a state, you did not have to collect sales tax for it.
The latest big ruling related to this issue was Quill Corp v North Dakota in 1992. During this period, the Internet was a novelty.
Many people did not have the Internet in their homes. It certainly was not in their pockets on smartphones like it is today, and online shopping was extremely rare. As a result, the case primarily related to the interest of mail-order catalogs.
Fast-forward about 20 years, and the landscape had changed considerably. E-commerce shopping had become a staple in most Americans’ lives, and this trend was starting to hurt the tax base for many states.
In the past, shoppers went to brick-and-mortar stores in their own area, and they paid to state and local sales tax on the purchase. The money helped to keep state coffers full so they had money for roads, education, healthcare, and other essentials. Then, as e-commerce became popular, sales tax revenues dwindled.
Because numerous states had a vested interest in overturning the Quill ruling, they began to write laws referred to as Kill Quill laws. One of the first was drafted in Colorado in 2010.
That law required out-of-state vendors to collect information on sales made to residents of Colorado. The Direct Marketing Association filed suit against the state, claiming the requirement broke the terms of the Quill ruling. Although the case was ultimately settled, it established the fact Quill needed to be changed.
Every year, more and more states tried to write Kill Quill laws, but ultimately, the South Dakota law was the one that went all the way to the Supreme Court. When the state drafted the sales tax rule, it included a caveat the law was only enforceable if ruled to be constitutional.
Then, the state sent a letter to the four e-commerce sites with the highest number of sales in South Dakota: Overstock.com, Wayfair, Systemex, and Newegg.
In response, Systemex simply decided to remit sales tax to the state, but the other three companies refused. The case went through the court system all the way up to the Supreme Court, and ultimately, the court overruled Quill. In support of the new ruling, Justice Anthony Kennedy noted e-commerce leads to a loss of between $8 and $33 billion per year in sales tax.
What You Need to Know
If you run an e-commerce store, you may be wondering how the Dakota v Wayfair ruling affects you. Ultimately, the specifics are still a bit unclear at this point, but it may be best to start collecting sales tax preemptively.
If you sell items through a site such as Etsy or eBay, the site may put in tools to help you collect and assess state sales tax. Similarly, if you use a platform such as Shopify for your e-commerce site, there is a chance sales tax tools may be built into those sites as well.
If you have a freestanding site, you may want to look into special plug-ins or software that can help you with this process, or use these sales tax calculators. You can also work with a developer to create your own tools.
Also, keep in mind you may need to register with each state individually, and of course, you need to remit separate sales tax forms to each state. Depending on your volume of sales and the rules in each state, you may need to pay at different times, such as monthly, quarterly, or annually.
For that to be possible, you may need to invest in sales tax software. There are a variety of options that can help you meet your sales tax liability in multiple states. Additionally, you may want to consult with an accountant to find out about your business’s sales tax liability and to help with preparing and submitting the forms.
With South Dakota vs Wayfair, you should be more concerned about sales taxes and worry about thousands of different jurisdictions. That can be confusing and time-consuming. As a result, many businesses and individuals get behind on their tax obligations. If you owe money to the Internal Revenue Service (IRS) in your state or in another state, you are not alone. Many businesses and individuals are in this situation. To get the help you deserve, contact us today. At Tax Help Solution, we believe in fighting for second chances for our clients.
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