Don’t miss the new rules for when and where you collect sales tax. If you get it wrong, you could get stuck having to write a big, fat check.
On June 21, 2018, the US Supreme Court ruled that state tax authorities have the right to require sellers to collect and pay sales tax for sales made in their state. That’s true whether or not the seller has a physical business in that state.
The court case that turned everything on its ear is known as the Wayfair case.
Before that, we followed another important court case known as the Quill case. That case stated that states could not require a business to collect and pay sales tax unless the business had a physical presence in the state.
That was before ecommerce. And that changed everything.
It’s now been almost 2 years since the landmark Wayfair ruling that impacted, initially, just one company in one state. Since that time, there are now 43 states and Washington DC that are following the case with their own economic nexus laws that require out-of-state businesses with a certain amount of sales to register their business for sales tax and then collect and pay sales taxes. Plus, business have to file sales tax returns in many of those states.
Two hold outs, Florida and Missouri, will soon follow the pack.
That only leaves 5 states that don’t have sales tax, Alaska, Delaware, Montana, New Hampshire and Oregon. Obviously, they won’t require that of online businesses.
All but Kansas do have a threshold before the sales tax requirement kicks in. If you’re below the threshold, you don’t need to follow the sales tax collection and reporting rules.
The thresholds vary from state to state and include:
• $100,000 in sales (Massachusetts and North Dakota)
• $100,000 in sales and 200 transactions (Connecticut)
• $100,000 in sales or 200 transactions (South Dakota and Wisconsin)
• $150,000 in sales (Arizona)
• $250,000 in sales (Alabama)
• $500,000 in sales (California and Texas)
One of the confusing things about the sales tax rules is that states have very different rules on what is subject to sales tax. Some states tax digital goods. Others do not. Some states tax some services. Many others do not.
It appears you must register with the tax department before the next invoice after crossing the threshold in the following states:
• District of Columbia
• South Dakota
In Ohio, you must register the day after you cross the threshold. The remaining states give you a bit more time: 30, 60, or 90 days after crossing the threshold, by the next quarter or by January 1 of the following year.
Do the above states really expect businesses to register so quickly after they cross their economic nexus threshold? What will they do if you don’t?
At this point, we don’t know. States are just waking up to the fact that they have a brand new revenue source and they’re scrambling to get enforcement in place.
The best bet is to get in compliance as soon as possible. If you sell through a marketplace, like Amazon, the companies will help you with that. If you sell through your own website, you’re a bit on your own. There are companies with apps (and building new ones) to help with ecommerce. You can bet companies will rush to fill this need.
At this moment, there are only rumors on whether states will move to use the Wayfair decision to prove income tax nexus as well. If there is income tax nexus, then we will be required to also file and pay income tax in other states as well.
So far, nothing is currently in place for this eventuality, but it is something we are watching closely.