Online shopping has turned into a booming business. One perk for many retailers and shoppers with online shopping is that most of the transactions were not required to collect sales tax. Instead, the shopper is to pay use tax to the state for all untaxed online purchases. In reality, that did not happen near as much as it was supposed too. Most customers do not understand that they should be paying sales tax on these products, and thus the states lose out on this money.
So, as the trend has continued to grow, many states have been looking at ways to tax online sales transactions as the sale occurs. Existing court rulings had been making this difficult because courts had consistently sent the message that sales tax could only be collected on transactions from businesses that have a physical presence in the state. Physical presence in a state can include a store, office or warehouse. For example, let's say John owns a business selling printer toner online. He lives in Georgia and operates his business out of his home. He primarily uses Amazon to sell his product. He has been keeping up with the sales tax when he sells a product in Georgia, but he has not had to for the other 49 states.
The existing sales tax laws have given a huge advantage to online retailers over businesses that operate in brick and mortar stores. Online only businesses have been able to not charge sales tax in the states that they did not have a physical presence. Companies that do have a physical presence in the state are not exempt from charging sales tax. These companies such as Amazon, Apple, Staples, Best Buy, WalMart and others who have stores or warehouses in the states that they are selling there product have to charge sales tax. Amazon does collect sales tax in every state that charges it, but third party sellers that use Amazon to sell their products are not always required to.
The old sales tax laws as we have known them for online retailers is about to change! In case you missed it, the United States Supreme Court just passed a ruling that will have a major impact on online shopping. The ruling announced on June 21, 2018, in the case of SOUTH DAKOTA v. WAYFAIR, INC says that states can now require internet retailers to collect sales taxes. The physical presence rule is no longer required. Now each retailer must determine whether they have nexus in that state. Nexus is simply determining whether the retailer has enough transaction in either sales volume or value. While there are still many factors that we do not know, we are certain that this is going to have a huge impact on online retailers and shoppers going forward.
States said that they were losing out on billions of dollars every year under the old laws for online sales tax. “Our state is losing millions for education, health care, and infrastructure, and our citizens are harmed by an uneven playing field,” said Marty Jackley, South Dakota’s attorney general. President Donald Trump tweeted about the ruling on Thursday as a “great victory for consumers and retailers.” Undoubtedly many states will be able to collect more sales tax revenue with this ruling. While it remains to be seen what rates will be used and what the requirements to file will be for some states, other states are already making announcements regarding the case. Several states have indicated that they will be providing guidance and updates in regards to their legislation. North Dakota has even announced that their economic nexus legislation is already effective.
What does this mean for you as a consumer? The days of purchasing items online in the hopes that you would not have to pay sales tax are going. Whether you go into a brick and mortar store or shop online, you will still have to pay the sales tax. While there is still a lot of uncertainty, online businesses will now mostly have to start collecting sales tax. While the rates may still be cheaper than the state and local rates at a store, the days of tax-free transactions seemed to be numbered. Since most sales will be taxed, individuals do not have to worry about trying to keep track of and paying use tax as much as they should have in the past.
What does this mean for online businesses? If you’re an online retailer, you have to determine if you fall under that state’s nexus legislation. Also, you need to determine if you have any traditional physical presence? If you do, then the nexus thresholds may not matter. You will also need to keep track of your sales volume by dollar and transaction total by state., You will also still have to determine taxability for the products and services you sell in the state. Nexus and physical presence will not be issues for any products are services that would normally be exempt. You will need to make sure for states and sells that are taxable that you are charging sales tax for your product, registering accounts with each state and timely filing the sales tax with each state. This is going to require more work that many companies are currently not set up to handle. If you have an online business and need help to make sure you are doing things properly, please reach out to me for business consultation. We will continue to work diligently to monitor the changes and updates as we move forward.
Here is a link to the official ruling: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf