What Recent Supreme Court Ruling Means for SMB Retailers

Business and Compliance Changes that May Affect Your ROI

July 25, 2018

If you are a small or medium-sized business with an online presence, you are probably all too familiar with the gray area regarding the collection of Internet sales tax. However, this past June, the Supreme Court issued a ruling in favor of the state of South Dakota over the online retail website, Wayfair, stating that in order to level the playing field, states now have the right to require online sellers to charge buyers sales tax in their respective states.

A Brief History of the Issue

Sales tax has been collected by state localities since the 1920s when buying locally was a consumer’s only option. However, with the growth of the Internet and the increased availability of online shopping over the past two decades, this convention has become less defined. Traveling to other states with lower sales tax rates or purchasing via remote channels where no sales tax is collected soon became common consumer practices. This has created a conundrum for state governments—should the tax rate be determined by the location of the buyer (destination-based) or seller (origin-based)?

This issue goes back to the 1992 Supreme Court decision, Quill v. N. Dakota, where it was ruled that a business “must have a physical presence in a state in order to require the collection of sales or use tax for purchases made by in-state customers”. This physical presence is called a tax nexus, referring to having a physical building, office, warehouse, retail store, or employees selling in the state.

However, the Quill decision really didn’t solve the problem since it simply dictated that only those online merchants who had a tax nexus in a state were supposed to charge sales tax, negating other states in which they sold. In response, states became more vigilant in expanding this definition to avert the constant erosion of sales tax revenue. In addition, localities in 38 states have followed suit and now charge sales tax in addition to state sales tax.

What Does This Mean for Your Online Business?

While the Supreme Court ruled in favor of South Dakota, it doesn’t precede all state laws. It remains to be seen how other states lean as the law is rolled out.

If your small business’s annual online sales do not exceed $100,000 or 200 transactions per year, you would be exempt. Other states may set different minimum sales or transactions, but again, states have not enacted the law as of yet.

The best thing you can do as a small or medium-sized business is to be cognizant of the ruling and look out for how it gets absorbed into your own state laws. Stay informed and ensure that your tax calculations and HR solution is equipped with the compliance protocols to report all earnings, collections, and computations to avoid costly penalties at the end of the year.


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