Last week, a monumental decision by the US Supreme Court changed a significant issue with sales tax on e-commerce sales. There are a lot of news stories out and we wanted to offer a condensed and timely update to our clients so that they can proceed with accurate knowledge.
WHAT IS THE ISSUE?
In 2017, retail e-commerce hit an all-time high of over $430B in sales (source, Comscore.com, “2018 State of the US Online Retail Economy” ). Everyone wants a piece of that tax money and, while some of that amount was taxed, there’s a significant number of online transactions that escaped taxable status because of the way tax codes were historically interpreted.
NEW TAX RULES
Previous to this decision, standard tax code applications required that, in order for a state to collect sales tax on internet sales, a merchant had to establish a “nexus” of business within that states’ jurisdiction. In other words, if you didn’t have a “business presence” (an office, warehouse, etc.) within that state, then you did not have to collect tax for that state. Brick-and-mortar stores have argued for many years that this provided an unfair advantage to internet retailers in general (although not universal advantage: some retailers like Amazon have been collecting state taxes for a long time). Municipalities and States have also argued the loss of billions of dollars of tax revenue because of this same “presence” issue.
The US Supreme Court favored the State of South Dakota, agreeing that the state had the authority to collect taxes on out-of-state transactions. This essentially changes sales taxes for all internet commerce moving forward. The long-standing “physical presence” requirement is no longer needed to trigger a nexus.
WHO IT AFFECTS
At this moment, the ruling hasn’t yet taken effect. But it certainly will soon.
South Dakota’s economic nexus law applies to any remote seller (any internet, Mail-Order/Telephone-Order, catalog order, etc.) that isn’t currently registered with the state and meets the threshold requirements: more than $100,000 in gross revenue from taxable sales, or 200 or more separate transactions for goods, electronically delivered products, or services.
WHICH STATES ARE INCLUDED?
South Dakota was the first state granted permission by the Supreme Court, but there are others closely behind! Currently, the following states have proposed changes in their laws for determining nexus rules:
Alabama, Connecticut, Georgia, Hawaii, Indiana, Illinois, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota (already mentioned),Tennessee, Vermont, Washington, and Wyoming.
We suspect that every state in the union will soon follow suit and create their own economic nexus rules to collect these taxes. We don’t know how similar those state’s laws will be to South Dakota’s and what differences may be in effect when those laws are ultimately passed. We do expect those laws to be updated quickly and most states to be swift in moving forward.
HOW MANY TAX JURISDICTIONS ARE THERE?
According to October 2017 data from tax software company Vertex, there are now at least 10,814 sales tax jurisdictions in the United States. (Source: Taxfoundation.org). Texas leads the way with almost 1,600 separate taxing jurisdictions. Missouri has 1,393 and Iowa has just over 1,000! Many more populous states (Like Michigan and Massachusetts) only have 1.
WHAT DOES THIS DECISION MEAN FOR OUT-OF-STATE MERCHANTS?
If you sell into states where you’re not registered to collect and remit sales tax, economic nexus can change your tax obligations. Rather than require a physical presence in a state, economic nexus is based entirely on sales revenue, transaction volume, or a combination of both. In South Dakota, the standards are more than $100,000 in gross revenue from taxable sales, or 200 or more separate transactions for goods, electronically delivered products, or services. Of course, some online merchants may not reach that threshold in South Dakota.
WHAT SHOULD YOU DO TODAY?
If you have an online store in place now, it’s important that you begin preparations for the changes.
Several things that you should be doing:
Pay attention to the rulings in those states where your transaction history is significant. If you’re in Arizona and do a lot of sales in Colorado, be watching those state’s deliberations.
Begin reviewing your sales reports and recognize when you’re starting to approach these state-standards (when they’re announced).
Consult with your tax accountants and tax attorneys – they will ultimately be the best source of advice for what tax codes are going to effect your business.
Begin a discussion with The Ridgefield Group about how to prepare your website to BEST HANDLE these new jusidictions, upcoming tax laws, and remain compliant for all facets of these issues.
If you don’t have questions, you should consider reading through this again! There are dozens of variables involved and the only sure thing (today) is that changes are coming. The speed, breadth, and impact are yet to be determined, but be assured that it will impact online sales.
If you’d like to talk, we’d love to listen…. Reach out to us using the form below and we can plan a path forward.