Does Your Business Need to Collect Sales and Use Taxes for Other States?

Use these links to jump to different sections:

• How It Changed for Retail Sales and Taxable Items
• State Tax Collection and Terminology Can Vary
• Marketplace Sellers May Need Legal Advice on Tax Liability

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, that state taxing agencies can require remote businesses 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.

The previous standard, says Richard Litwin, an Atlanta attorney who specializes in state and local tax issues, related to the concept of substantial nexus.

“Before Wayfair, substantial nexus meant physical presence,” Litwin says. “In other words, if a remote seller based in Georgia—as an example—had independent contractors or sales representatives that 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: “That 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.”

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% 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 to $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.

How It Changed for Retail Sales and Taxable Items

South Dakota went first. “In 2016, South Dakota enacted Senate Bill 106,” Litwin says. “Under S.B. 106, a seller with no physical presence in South Dakota 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. After Wayfair, those statutes became enforceable.

Many states followed South Dakota’s threshold standards ($100,000 or 200 transactions), though some dispensed with the individual-transaction threshold while others raised the sales-revenue threshold.

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.

Nexus is a term used when a business has a tax presence in another state. Because of the Wayfair decision, nexus can now mean either physical presence nexus (the previous standard: 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).

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 2018 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,” Litwin says, “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—before COVID— were certainly very aggressive. And we expect that to pick back up as we come out of COVID.”

If you would like to learn more about this area of the law, please see our tax law section or reach out to a reputable tax attorney.