For more than 25 years businesses have safely avoided collecting, reporting and remitting sales tax in South Dakota and other states where their only business connection was nothing more than delivering purchases to customers who happen to live far away. Early on, these purchases were mostly tangible items ordered from catalogs. Today, digital goods or software purchased over the internet are also common.
In a recent rare foray by the U.S. Supreme Court into the world of state taxes, SCOTUS has put these common business practices into uncertainty. The old rule only seemed logical: we don’t have business facilities, people or operations in the state, why should we have to collect sales tax there?
But, as any business person quickly learns, logic is infrequently a factor with it comes to taxes, and many states would love to have your company collecting sales tax for them. You may not know that your protection from this burden actually came from the 1992 SCOTUS decision in Quill Corp. v. North Dakota. That case stood for the notion that a remote seller could not be forced to collect sales tax in a state where the seller had no physical presence.
If you’ve ever price-shopped an item on the internet and noticed that one seller charged sales tax while another didn’t, there is a good chance that Quill was the reason. The first seller may have had employees or property in your home state, while the other seller did not.
Recently the Court threw out this long-standing rule and, in South Dakota v. Wayfair, Inc., overturned Quill to validate that state’s aggressive new statute. The law, enacted to intentionally challenge Quill, required any remote seller with more than either $100,000 in annual sales, or 200 annual business transactions, to charge sales tax to in-state customers.
South Dakota won their gambit and, while the new rule was applied only to their statute, by explicitly overturning Quill the Court invited other states to jump on the bandwagon. It also provided a convenient roadmap for how to do so without running afoul of the U.S. Constitution which remains the ultimate protector of state overreaching in the taxation of multistate business.
While a few other states may be able to take advantage of the Wayfair decision immediately, many will have to enact new law to do so. You can expect a flurry of legislative activity across the nation in the next 12 to 18 months. And, as with all things sales tax, you can expect plenty of inconsistency across states and lots of uncertainty in interpreting the new laws.
While you can’t predict when and how law changes in each state will affect your business, you can take steps now to minimize your exposure. Now is the perfect time for a sales tax check-up. Remember, sales tax is supposed to be paid by the buyer, so your only burden is the administrative cost of compliance. However, when you come out on the wrong end of a sales tax audit, you may end up paying the tax, plus substantial interest and penalties, and have no ability to go back to customers from 3 or 4 years ago for reimbursement.