June 21, 2018, marked a pivotal date for ecommerce. Because the United States Supreme Court ruled states may now impose taxes on out-of-state sellers. In other words, ecommerce businesses are now subject to more state taxes.
Here’s a quick rundown on the history of this decision.
National Bellas Hess v. Illinois
For 50+ years, it’s been unconstitutional for a state to impose a sales tax on merchants or companies that did not have a physical presence in that state. This law was enacted as a result of the Supreme Court’s ruling in National Bellas Hess v. Illinois.
The Court asserted it “has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail.”
So if you did not have headquarters, factories, warehouses, etc. in Texas, for example, you would not incur a Texas state sales tax — even if you sold goods in Texas. This law has exempted remote sellers such as ecommerce businesses from potentially billions of dollars in taxes.
Senate Bill 106 and South Dakota v. Wayfair, Inc
In 2017, South Dakota passed Senate Bill 106, intending to tax out-of-state merchants selling in their state. Wayfair, among a few other companies, decided to challenge South Dakota on this law.
On June 21, the Supreme Court ruled in favor of South Dakota in the case of South Dakota v. Wayfair, Inc. To understand how disruptive this is to ecommerce, you first need to know about economic nexus. Economic nexus is a tax collection obligation based on the level of economic activity a seller has within the state. And this ruling nullified the physical presence requirement to trigger nexus.
Economic nexus is not a new concept. It exists in many states, and every state has its own guidelines about what constitutes nexus. South Dakota v. Wayfair, Inc. did not repeal the standing guidelines for nexus. Rather, the Supreme Court decision simply removed a barrier for nexus: physical presence.
What South Dakota v. Wayfair, Inc Means for Out-of-State Companies
This is a big deal. It completely changes the game for ecommerce sellers who are now facing various state taxes they’d never been subject to before. But the issue is complicated.
State sales tax imposed on companies will be determined by economic nexus. And states can define nexus in many ways. For example, a state could claim economic presence at $100,000 in sales or 200 separate transactions in one year (whichever comes first). Once a company has reached this threshold, it has established nexus, and is subject to the state’s income tax. Rates and rules will be decided on a state-by-state basis
It is important to understand that if your business exists in a state, you’re liable for state taxes. But now your business existing out of the state is no longer a safeguard from that state’s income taxes. Additionally, this decision does not only apply to ecommerce merchants. This applies to both online and offline sellers. For example, SaaS companies and non-tangible goods and services are subject to this ruling, as well.
With ecommerce sales increasing, this decision isn’t entirely surprising. But South Dakota vs. Wayfair, Inc. doesn’t have to disrupt your business. Wherever you sell and ship, make sure your company is prepared for the change ahead. Meet with your accounting specialist to discuss this ruling’s implications for your company. Online sellers must collect sales tax in New Jersey, North Carolina, South Carolina, and South Dakota effective November 1st.
For more coverage of the impact of the South Dakota v. Wayfair, Inc. ruling, visit Avalara’s webinar on this decision and it’s implications. The webinar will take place on Thursday, December 6th at 11 AM P.T./ 2 PM ET. Learn how economic nexus is triggered, which types of companies are most affected, how this affects your business, and more.