California and Many Other States Now Require Retailers to Collect State Sales Taxes

By SEMA Washington, D.C., Staff

Last June, the U.S. Supreme Court ruled that states may require internet retailers to collect sales taxes even when they have no physical presence in the state. The Court overturned the 1992 “Quill vs. North Dakota” decision, which said that retailers must have a certain level of physical presence (nexus) before that state can force the retailer to collect taxes.  

The court supported a South Dakota law passed in 2016 that required an out-of-state retailer to collect sales taxes regardless of whether there was a physical presence. The South Dakota law established a small-business exemption for retailers with less than $100,000 or 200 transactions in annual sales. The court found that the combination of an exemption and free or affordable software for calculating the taxes should help address collection challenges.

More than 30 states will now require collection, immediately or in the near future. Most of the states have taken South Dakota’s approach and created a small business exemption for retailers with less than $100,000 or 200 transactions per year, or a bit more than that amount. A few state laws are already in effect and many others are scheduled to start in 2019, including California, which is set to start on April 1, 2019. The list of states requiring collection include Alabama, Arkansas, California, Colorado, Connecticut, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin.

Five states do not impose sales tax—Delaware, New Hampshire, Montana, Oregon and Alaska (although some municipalities in Alaska do).  

The U.S. Supreme Court noted that Congress has always had the authority to enact legislation to authorize collection, but that has not occurred to date. The court ruling along with implementation by many states may now spur Congress to establish a single federal standard, including a uniform small-business exemption and limited ability for states to pursue out-of-state audits. Various studies estimate that the potential amount of uncollected state sales taxes may range from $13 to $33 billion.

Below are states pursuing out-of-state sales tax collections as of January 24, 2019. For additional information, SEMA recommends that you contact your accountant or tax professional. If you have any questions, contact Stuart Gosswein at stuartg@sema.org.

*Rhode Island, Washington and Georgia allow retailers to include a statement telling customers to submit sales tax in lieu of collecting the tax; those retailers must send Georgia customers with more than $500 in purchases a tax statement each year; in Washington, retailers with more than $100,000 in sales to the state must collect tax.
**Colorado has a grace period that will run through May 31, 2019.
***Tennessee signed an online tax legislation into law, then passed another law prohibiting enforcement of the passed law.