By Joanna Agosta Shere
On June 21, 2018, the South Dakota vs. Wayfair case changed the tax landscape for internet sales tax. The U.S. Supreme Court decided in favor of South Dakota in giving states the option of requiring sales tax collection by remote retailers (internet, mail-order, phone, etc.) when the seller doesn’t otherwise have a physical presence in the state (property, employees, sales representatives, etc.). The Court recognized companies could establish a sufficient economic presence in a state to create nexus, in addition to a physical presence. In this case, the Court recognized South Dakota’s law setting economic nexus at $100,000 or 200 in yearly sales transactions into that state as being reasonable. In so doing, the Court overturned its 1992 Quill Corp. vs. North Dakota ruling that required a physical presence when taxing interstate commerce.
The 2018 Court ruling poses a potential challenge for a small business’ ability to monitor sales where a company does not have a physical presence and address the different state tax policies and procedures. This can be a very difficult, and expensive, landscape to cover for the small business selling online.
First of all, it would be a good recommendation to work with a business tax specialist who can help guide you through the various state requirements. Five states do not have sales tax requirements. Most others now have minimum sales or transaction thresholds for creating economic nexus or are in the process to establishing them. For example, in Massachusetts, you only create nexus once you have sold at least $500,000 worth of goods or services or at least 100 transactions. Many other states have adopted the South Dakota approach of $100,000 of sales or 200 transactions. Once you have reviewed your sales data, you can then determine if you need to collect sales tax.
Only selling business-to-business does not necessarily get you off the hook for collecting sales tax. Most states require that you possess their re-sell certificates in order to not charge for sales tax. These exemption certificates need to be updated periodically depending upon each state’s policies.
An example of another consideration is displaying and/or selling at swap meets. Some states have tradeshow exemptions, but in other cases, by displaying product in that state, you have created physical nexus even if you do not meet the sales or transaction minimum thresholds. Drop shipments may also create nexus. Even if you sell to a business with a re-sell certificate, if you drop ship that order for them into another state, you may be creating nexus unless they are able to provide you with a sales and use tax certificate for each state in which they have customers.
Trying to keep up with all the different state tax laws can easily become an administrative nightmare. There are some different tax software programs that can help. From the very expensive to more reasonable, prices vary significantly, and you will need to determine which one best suits your need.
Before dashing out and registering with states to collect sales tax and buying a software program, some good advice might be to step back and review the tax landscape. Are your sales close to meeting any of the state economic thresholds? Do you already have a physical presence in a state (e.g. sales representatives) and a tax collection liability? Are there any other state tax liabilities to consider (e.g. Ohio’s corporate activity tax based on $500,000 or more by an out-of-state company). The sales tax review process is important since all states have a voluntary disclosure agreement process to address and limit existing tax liabilities, but the process is not available once you have registered to collect state sales tax.
As always, seek out professionals who specialize in tax concerns. There’s no one solution and you need to do what’s best for your organization. Seeking knowledge on these changes will help protect you from tax liability and penalties down the road.
Below are states pursuing out-of-state sales tax collections, as of February 28, 2019.
|State||Sales tax collection start date||Exemption for Minimum Sales|
|Alabama||October 1, 2018||$250,000|
|Arkansas||Pending||$100,000 or 200 transactions|
|California||April 1, 2019||$100,000 or 200 transactions|
|Colorado**||December 1, 2018||$100,000 or 200 transactions|
|Connecticut||December 1, 2018||$250,000 or 200 transactions|
|District of Columbia||January 1, 2019||$100,000 or 200 transactions|
|Georgia*||January 1, 2019||$250,000 or 200 transactions|
|Hawaii||December 1, 2018||$100,000 or 200 transactions|
|Idaho***||July 1, 2018||$10,000|
|Illinois||October 1, 2018||$100,000 or 200 transactions|
|Indiana||October 1, 2018||$100,000 or 200 transactions|
|Iowa||January 1, 2019||$10,000|
|Kentucky||October 1, 2018||$100,000 or 200 transactions|
|Louisiana||January 1, 2019||$100,000 or 200 transactions|
|Maine||July 1, 2018||$100,000 or 200 transactions|
|Maryland||October 1, 2018||$100,000 or 200 transactions|
|Massachusetts||October 1, 2017||$500,000 or 100 transactions|
|Michigan||October 1, 2018||$100,000 or 200 transactions|
|Minnesota||October 1, 2018||10 transactions totaling $100,000 or 100 retail transactions|
|Mississippi||September 1, 2018||$250,000|
|Nebraska||January 1, 2019||$100,000 or 200 transactions|
|Nevada||October 1, 2018||$100,000 or 200 transactions|
|New Jersey||November 1, 2018||$100,000 or 200 transactions|
|New York||January 15, 2019||$300,000 or 200 transactions|
|North Carolina||November 1, 2018||$100,000 or 200 transactions|
|North Dakota||October 1, 2018||$100,000 or 200 transactions|
|Oklahoma||July 1, 2018||$10,000|
|Pennsylvania||April 1, 2018||$100,000|
|Rhode Island*||August 17, 2017||$100,000 or 200 transactions|
|South Carolina||November 1, 2018||$100,000|
|South Dakota||November 1, 2018||$100,000 or 200 transactions|
|Tennessee****||Stayed pending litigation||$500,000|
|Texas||October 1, 2019||$500,000|
|Utah||January 1, 2019||$100,000 or 200 transactions|
|Vermont||July 1, 2018||$100,000 or 200 transactions|
|Washington*||October 1, 2018||$100,000 or 200 transactions|
|West Virginia||January 1, 2019||$100,000 or 200 transactions|
|Wisconsin||October 1, 2018||$100,000 or 200 transactions|
*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.
***Idaho does not have an economic nexus law, but it does have click-through nexus, where a seller contracts with an in-state retailer to refer customers to the seller for commissions, effective July 1, 2018.
****Tennessee signed an online tax legislation into law, then passed another law prohibiting enforcement of the passed law.