Do I Need to Charge Sales and Use Taxes When Selling in Other States?
Yes: A tax lawyer discusses the impact of the U.S. Supreme Court’s Wayfair decision
By Erik Lundegaard | Reviewed by Canaan Suitt, J.D. | Last updated on August 1, 2024 Featuring practical insights from contributing attorney Richard C. LitwinUse these links to jump to different sections:
- Before Wayfair, A Company’s Physical Presence Was Required for State Tax Purposes
- A Company’s Physical Presence Is No Longer Required
- Sales and Transaction Thresholds for Retail Sales and Taxable Items
- State Tax Collection and Terminology Can Vary
- Marketplace Sellers May Need Legal Advice on Tax Liability
- Find an Experienced Tax Lawyer
If you own a business that makes frequent sales in other states, your business practices may have changed after June 2018. That’s when the U.S. Supreme Court ruled 5-4 in South Dakota v. Wayfair, Inc. that state taxing agencies can require out-of-state sellers to collect a state’s sales and use tax for purchases by the state’s residents even if the business has no physical presence there.
Before Wayfair, A Company’s Physical Presence Was Required for State Tax Purposes
The previous legal standard, says Richard Litwin, an Atlanta attorney who specializes in state and local tax issues, related to the concept of substantial nexus. “Nexus” is a term used when a business has a tax presence in another state.
“Before Wayfair, substantial nexus meant physical presence,” Litwin says. “In other words, if a remote seller based in Georgia, for example, had independent contractors or sales representatives who were located in or traveled to another state, that would be enough to give the seller physical presence or substantial nexus in the other state—and thus require the Georgia seller to collect the other states’ sales and use tax on taxable products shipped to customers in the other state.”
He adds: “[Physical presence nexus] was basically the law that had been in existence for many, many years, going back to the late ’60s, and it was reaffirmed in 1992 with the Quill Corp. v. North Dakota decision out of the U.S. Supreme Court.”
A Company’s Physical Presence Is No Longer Required
Of course, buying habits changed greatly after 1992. “You would walk into a brick-and-mortar store, see a product that you want to buy, and go buy it online for 20 percent less,” Litwin says. As e-commerce prospered, brick-and-mortar stores suffered. So did government coffers. A 2017 report from the Government Accountability Office suggested that local governments could gain between $8 billion and $13 billion if given the authority to tax remote sales.
“So, we saw a push to enact remote seller legislation to even the playing field,” Litwin says. And thanks to the Wayfair decision, a business’s tax nexus can now mean either:
- Physical presence nexus: A remote business having an office or salespeople in another state; or
- Economic nexus: A remote business reaching that state’s sales threshold or number-of-transactions threshold.
Sales and Transaction Thresholds for Retail Sales and Taxable Items
South Dakota was the first to change its state law. “In 2016, South Dakota enacted Senate Bill 106,” Litwin says. “Under the [South Dakota law], a seller with no physical presence in [the state] must nevertheless collect South Dakota sales and use tax if the seller’s gross receipts from deliveries into South Dakota exceed $100,000 or if the seller makes sales for delivery into South Dakota in at least 200 separate transactions.”
The other 45 states that collect sales tax followed suit with their own nexus laws, in many cases borrowing South Dakota’s standards:
- $100,000 sales threshold; or
- 200 transactions threshold.
However, some states (including, eventually, South Dakota) eliminated the individual transaction threshold, and others raised the sales-revenue threshold for out-of-state retailers.
State Tax Collection and Terminology Can Vary
“The states differ with regard to their effective dates, the lexicon they use, the filing frequency, how often you have to file,” Litwin says. “Remote seller laws also prompt questions about whether the remote seller must register with the Secretary of State in the other state. It prompts questions about whether the remote seller is subject to local jurisdictions’ sales taxes.”
And while the thresholds would seem to limit the exposure to bigger businesses, Litwin cautions, “You can imagine somebody could sell $5 trinkets online and have 200 transactions in one state pretty quickly. And that does happen.”
The Wayfair decision also prompted questions of whether a business was doing things correctly in the first place.
Marketplace Sellers May Need Legal Advice on Tax Liability
Many businesses, post-Wayfair, sought out Litwin for guidance on the new economic nexus standards. But for some, Litwin found that the businesses already had physical presence nexus in other states.
“It prompted these businesses to reflect on what is really going on in their business,” he says. “When they come to me, I tell them, ‘Look, you’ve had salespeople in these other states for many, many years, and you haven’t been collecting sales tax. This is not just an issue that goes back to [the 2018 Supreme Court decision] for you. This is an issue that goes back to traditional physical presence nexus, and it goes back many, many years.’”
The good news, Litwin adds, is that most states allow businesses to come forward “through counsel, typically, to disclose and remit uncollected taxes as long as the state has not contacted the business. In consideration, the state taxing agency relieves the business of penalties and limits the lookback period to three or four years, generally.”
The bad news is such accommodations may not last. “I’ve had a couple of states send out notices that state, for example, ‘Our state enacted legislation in 2019, and you may be required to collect our state’s sales and use tax under our new economic nexus statutes.’ And so the states… were certainly very aggressive,” says Litwin.
Find an Experienced Tax Lawyer
Visit the Super Lawyers directory to find a reputable and experienced tax attorney in your area for any questions related to sales tax laws and compliance.If you would like to learn more about this area of the law, see our overview of tax law.
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