Small businesses in a post–South Dakota v. Wayfair, Inc. world
If you’re a small business, you’ve likely heard about the recent United States Supreme Court decision in South Dakota v. Wayfair, Inc. It’s a big case with a big impact, so let’s talk about what you should know as a small business.
A quick summary of the case
Until recently, state governments could only require a business to collect and remit (hand over to the tax authority) sales tax if the business had a physical presence in the state — a storefront, a remote employee, traveling sales reps, etc. But on June 21, 2018, the Supreme Court decided that economic activity alone would be enough to get you on the hook for sales tax.
To be clear, physical presence is still first and foremost. If you have a physical presence in a state, you likely need to collect and remit tax in that state. And physical presence can be established in some surprising ways, like an employee having a layover at an airport during a business trip, storing products for sale, even placing software like web cookies and apps on in-state devices.
But now, sellers need to pay attention to physical presence and economic activity. That includes online sales, mail order sales, and phone sales from out of state.
There were three parties involved in the South Dakota case: Newegg, Inc., Overstock.com, Inc., and Wayfair, Inc. All are large, global, ecommerce businesses that presently do not have a physical presence in South Dakota and, hence, weren’t responsible for sales tax when physical presence was the only game in town.
After the ruling, Overstock.com announced it would collect and pay sales tax in all states and said it anticipates “no appreciable impact on our business.” Likewise, Wayfair issued a statement welcoming “the additional clarity provided by the Court’s decision.” As the company already collects and pays tax on approximately 80 percent of its American orders, it doesn’t expect the ruling “to have any noticeable impact on our business.”
Larger companies may have the privilege to shrug their shoulders in light of this groundbreaking decision, but what about small businesses? Does the ruling have a noticeable impact on them?
Protection for small sellers
In its post-ruling statement, eBay pointed out that Newegg, Overstock, and Wayfair each sell “more than $1 billion per year, and in some cases much more.” The company urged Congress to “step in and provide clear tax rules, with a strong small business exemption,” noting that the court “was very clear about the importance of protecting small businesses from unfair burdens.”
Indeed, the Supreme Court highlighted three aspects of South Dakota’s tax system that seem to be looking out for small businesses and their growth.
- There’s a small business exception. An out-of-state business doesn’t have to collect tax until it has more than $100,000 in gross revenue from South Dakota sales, or 200 or more separate transactions in the state in the previous or current calendar year.
- Even with the new ruling, no business will have to collect or pay sales taxes from past business activity. The law ensures sales tax may not be applied retroactively (i.e., to past business transactions).
- South Dakota is, on paper, committed to making sales tax less burdensome. The state is a member of the Streamlined Sales and Use Tax Agreement (SST), an organization created to simplify the administration of and reduce the cost of sales tax compliance for businesses.
Small seller exception. South Dakota’s law protects small sellers from having to collect and remit sales tax in the state until they’re doing a certain amount of business there. To date, all other states that have adopted what’s called economic nexus also have a threshold that must be met before nexus (a connection with the state significant enough to trigger a tax collection obligation) is triggered: either a dollar amount, a transaction amount, or both. See a list of states and thresholds here.
Past business activity. The Supreme Court liked that South Dakota won’t try to tax past sales. But other states may decide to do differently. For example, Rhode Island says out-of-state sellers “could be liable for tax on Rhode Island sales that were made prior to the Wayfair decision on June 21, 2018.”
South Dakota is an SST state. SST member states have taken steps to reduce costs associated with sales tax compliance, as well as simplify tax remittances and returns, the administration of exemptions, and more. To date, there are 23 full members and one associate member. In addition, the organization provides sellers access to sales tax administration software paid for by the state. Sellers that use such software are, as the Supreme Court noted, “immune from audit liability.” This can benefit sellers of all sizes, but particularly small sellers with limited resources.
What’s a small seller to do?
The Supreme Court ruling emphasized a need to protect small businesses from the burden of collecting sales tax in multiple states. But that doesn’t mean small sellers are off the hook. At this point, gathering information about your unique situation is absolutely the way to go.
Though going through state sales tax laws can be overwhelming, here are some manageable steps a small business owner should consider taking next:
- Find out which states have passed laws to tax out-of-state sellers. Check out our comprehensive list here.
- Determine where you make sales, and where you do and don’t collect tax.
- Talk to a trusted tax advisor. The team at Avalara Professional Services is more than happy to help you find one.
- Get a nexus analysis to better understand your sales tax obligation.
This economic activity trend doesn’t stop here — the list of states that tax businesses based on economic activity alone is likely to get longer. Even The National Conference of State Legislatures is urging states to review their sales tax laws in light of the Supreme Court ruling in South Dakota v. Wayfair, Inc.
With all these new developments in the sales tax world, it’s worth the effort now more than ever to learn more about your business’s unique sales tax situation. Head over to Sales Tax Essentials for Small Business to get pointers on both sales tax concepts and management processes.
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