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Do you need to collect sales tax without a physical presence in a state(s)?

July 2, 2018

In a 5 to 4 decision, the United States Supreme Court just decided a case (South Dakota vs. Wayfair) that could require your business to collect and remit sales tax on the "sales of goods and services" regardless of whether your business, as the seller, has a physical presence in the state(s). Expect that other states will attempt to line up with South Dakota.

In the case of South Dakota, an out-of-state retailer is required to collect sales tax if it has:
  • Annual gross revenue of more than $100,000 from sales in South Dakota; or
  • Completed more than 200 sales annually in South Dakota.
The Court pointed out that South Dakota's tax system does not discriminate against or create undue burdens on interstate commerce because it excludes taxpayers who transact little business in the state, it uses technology to assist taxpayers with compliance, and its law is not retroactive.

The Wayfair decision overturned two prior Supreme Court cases (Quill Corp. vs. North Dakota and National Bellas Hess, Inc. vs. Illinois) that largely prevented states from requiring sales tax collection of remote sellers without a physical presence in the state. And while the Wayfair decision could be far-reaching in terms of states pressing to adopt a similar requirement, it should not be viewed as a rubber stamp on a state's ability to impose sales tax collection on out-of-state companies. In particular, state legislation will be required to permit collection, and thresholds will need to be established to prevent unreasonable compliance burdens.
In general terms, the following points were made in Wayfair:
  • Mere lack of a physical presence no longer absolves a remote seller from a collection requirement.
  • Allowing out-of-state businesses to avoid collection is akin to a tax shelter.
  • There is an unfairness in requiring an in-state business to collect while providing an exclusion for an out-of-state business, especially if the former has minimal activity and the latter has substantial internet based activity. Under these circumstances, the physical presence standard arbitrarily provides the out-of-state seller with an unfair competitive advantage.
  • The prior cases decided by the Court do not line up with today's e-commerce way of doing business.
It's interesting to note that this decision provides further opportunity for states to collect tax revenue using a "market based" approach. This approach looks to where customers are located vs. where services are actually provided or from where goods are shipped. For years now, states have been adopting this approach for service based companies to create "income tax" nexus/exposure even if the services are performed remotely. Will sales of goods be targeted next? I sure hope not as the compliance burden would drive many companies out of business.

So will this affect your business? Like so much in tax, the answer is "it depends." In what states are your customers? Do you sell goods or provide a service? If goods, do you have a sales tax exclusion based on who they're sold to? If a service provider, what states impose sales taxes on services and on what kind? Does your company have systems in place if collection and remission is required?

Rest assured that this case is getting "national" attention from the states outside of South Dakota. There is much more to come on this and we will advise accordingly as other states take action, if any. In the meantime, please contact your Sisterson representative for further information and/or an analysis.

Contact Bill Richardson at 412.594.7708 or wmrichardson@sisterson.com with questions.