South Dakota v. Wayfair, Inc.: What It Means For You
October 24, 2019 Andrew AdolphExports
A decision rendered in a tax court case out of South Dakota has major implications for anyone who sells products in the USA.
Currently, in the USA, 44 states have some form of sales tax, much like our GST and PST systems in Canada. But until recently, they have only been able to impose it on the businesses located within their state. With the explosion of online sellers like Amazon and Shoplift, these states have altogether missed out on an estimated $13 and $34 billion in sales tax revenue, depending on who you ask. California alone was missing out on approximately $2 billion in revenue per year.
Since 1992, the US Supreme Court has held to the position that the United States Constitution bars states from collecting sales tax from vendors who have no physical presence in their state, a concept known as “taxation nexus”. One Supreme Court judge called it a “judicially-sponsored tax shelter for online sellers.”
Since then, 35 states have been trying to get the decision, known as Quill, overturned. In June, 2018, they succeeded.
South Dakota v. Wayfair
South Dakota is a state with no income tax and that therefore relies heavily on its sales tax revenue.
Wayfair is a large online seller where you can buy pretty much anything for your home.
In 2018, the Supreme Court decided it would consider a case brought by South Dakota. The fact the United States Supreme Court would hear a sales tax case was almost a bigger deal than the sales tax case itself. But on June 21, 2018, the high court decided that online retailers are required to collect sales tax regardless of whether or not they had physical nexus in that particular state.
The ruling was immediately adopted by most of the other states. Most states implemented the ruling effective January 1, 2019, although some states are adopting it retroactively to June 21, 2018, the date of the decision.
What This Means for You
If you are a Canadian business that sells goods online to customers in the USA, you could potentially have to register each state that has a sales tax, collect state sales tax, and remit it to them.
The good news is that most states recognize how this ruling could negatively affect interstate commerce for smaller vendors, and have adopted thresholds, below which you don’t have to bother. The model that most of them have adopted is more than 200 shipments into that state or more than $100,000 (US) in sales annually.
What if I Don’t Bother?
With 44 states collecting sales tax, some businesses will find that the cost of complying with some of them will be more than the tax amount involved. And for the states, the cost of auditing smaller online retailers may not be worth the ultimate cost of prosecuting someone from out of state.
A key consideration for you should be whether you have key suppliers or customers in a particular state. Here in Canada, it is not unheard of for the CRA to issue a garnishee order on a captively-located third-party customer or supplier. The states could conceivably do the same.
If you are unsure how this affects you, you should have your sales tax expert review your orders to determine your exposure. If you are Amazon, you probably have a host of in-house sales tax experts. Smaller operators should still review their sales levels annually in order to know their exposure.
One last thing. Collecting sales taxes in itself does not affect your profit margin, because your customer is paying. Unfortunately, the same can’t be said about the cost of complying with multiple jurisdictions all of a sudden.
Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.