Sales Tax 101

South Dakota v. Wayfair: Two Years Later

by Jennifer Dunn

South Dakota v. Wayfair Sales Tax

On June 21, 2018 sales tax as we know it changed forever. 

Normally we wouldn’t make such dramatic statements, but it’s pretty safe to say that when the Supreme Court (SCOTUS) found in favor of South Dakota in South Dakota v. Wayfair, almost every eCommerce business was affected in some way. 

Two years later, eCommerce sellers are navigating a whole new sales tax landscape.

What was the big deal about South Dakota v. Wayfair?

Before the Wayfair decision, the Supreme Court precedent set through Quill v. North Dakota (1992) held that businesses must have some kind of significant presence in a state (a location, employee, inventory, etc.) before the state could require that that business register and collect sales tax from buyers in the state.

Wayfair changed all that. To test this issue, South Dakota passed a law stating that any retailer who made more than $100,000 in sales into their state or more than 200 sales transactions into the state were required to collect sales tax – no matter if they had a physical presence or not. When South Dakota won their challenge, the court set a new precedent: “economic nexus.” 

Dig into more resources on South Dakota v. Wayfair here.

Economic Nexus Laws

By the time SCOTUS handed down their ruling in Wayfair, a handful of other states also had economic nexus laws on the books. They’d passed them hoping that South Dakota might win, and they won that bet. 

Free Resource: The Ultimate Guide to Understanding Economic Nexus

Other states hurried to follow suit. From the states’ point of view, there wasn’t much downside to an economic nexus law. It allowed them to require that remote (out-of-state) businesses collect sales tax and remit it back to the state. The states saw dollar signs and increased revenue to pay for budget items like schools, roads and public safety. (And a business that isn’t located in your state doesn’t have any voting power over you, either.)

These days, over forty US states and Washington DC all have economic nexus laws.

It is important to note that each state is different. While many used South Dakota’s threshold of “$100,000 in sales or more than 200 sales transactions” into the state as their guide, other states set different thresholds. 

For example, California and Texas set high thresholds of $500,000 in sales with no transaction limits. While Kansas boldly announced that all eCommerce businesses who made sales into the state were required to collect sales tax in that state, no minimum threshold. 

See a frequently-updated list of states with economic nexus laws and their thresholds here.

And try TaxJar’s Economic Insights Tracker to determine where you have economic nexus.

Marketplace Facilitator Laws

Since Wayfair, nearly 40 states have also adopted Marketplace Facilitator laws. 

States with Marketplace Facilitator Sales Tax Laws

Marketplace facilitator laws require that online marketplaces like Amazon or Walmart that meet certain thresholds collect sales tax on behalf of 3rd party businesses who use their service.

Again, the states’ goal with these laws is to collect as much sales tax revenue as they can as efficiently as possible.

Example:

Before marketplace facilitator law went into effect, an Amazon seller might have sales tax nexus in 25 states due to their headquarters, employee locations, activity at trade shows and Amazon storing their inventory in fulfillment centers in various states. In this scenario, that seller was required to comply with sales tax law in all twenty-five states. While this placed a huge burden on the seller (unless they used TaxJar, of course), some states might have only collected a few dollars from this seller every time they filed a sales tax return.

After passing a marketplace facilitator law, the state is happy because Amazon collects sales tax on behalf of their 2.5 million+ 3rd party sellers and sends that amount to the state in one big sum. And, the state doesn’t have to go to all the trouble of hunting down smaller non-compliant sellers in order to get their revenue.

Marketplace facilitator laws are also a win for 3rd party marketplace sellers, but with some caveats, including:

  • 3rd party sellers are often still required to hold sale tax permits and file sales tax returns (even if that return is “zero” because the marketplace collected on their behalf)
  • 3rd party sellers who have diversified off of Amazon to their own brick and mortar or online store are often penalized, because they have the added pressure of collecting and filing sales tax on some transactions but not on others
  • Not every state has a marketplace facilitator law, so 3rd party marketplace sellers still find their sales tax compliance life a patchwork of states where they are required to collect on their own and where marketplaces like Amazon collect on their behalf

Marketplace facilitator laws have been a big win for states, but individual businesses have found that they provide more questions than answers.

Read more about each state’s marketplace facilitator law here. 

Use Tax Notice and Report Laws Linger

Before the Wayfair decision, some states found a way to get around those old physical presence nexus requirements via use tax notice and reporting laws. These laws required that remote sellers who made over a certain threshold of  sales into the state take one of two options:

  1. Register for a sales tax permit and collect sales tax from buyers in that state
  2. Notify a segment of your buyers that you didn’t collect sales tax on their behalf and that they now ose use tax to the state and notify the state the names of your buyers so that they can ensure use tax is enforced

Option #2 not only created a brand new paperwork burden for eCommerce businesses, but a negative customer experience, too. (As a customer, I can’t imagine being happy to receive a letter from a business I purchased from telling me that I now owe additional tax to my state.)

Economic nexus laws have mostly phased out notice and report laws, but they do still linger on the books or in states’ administrative codes. If you’re concerned that you’re required to comply with a notice and report law, we recommend speaking with a state and local tax expert.

Some States Finally Giving eCommerce Businesses a Break

It’s not all bad news for eCommerce businesses. One of the biggest obstacles to sales tax compliance has always been the fact that each state sets its own sales tax rules and laws. There are more than 14,000 taxing jurisdictions around the country, which places a heavy burden on businesses to figure out how much to collect, which jurisdiction governs a sales tax transaction, and how to comply with the state’s individual reporting and filing requirements. 

However, some states, like Texas, realized that they were asking a lot of remote sellers when asking them to determine the city, county and other special taxing rate on each and every sales transaction. Texas took the stop of allowing remote sellers to simply collect one single sales tax rate from all Texas buyers. 

Hopefully, more states will follow in the footsteps of Texas, Alabama, Louisiana and a handful of other states who allow remote sellers to collect a single rate. 

Alaska Enters the Sales Tax Fray

Alaska always allowed individual jurisdictions to levy a sales tax, but never had a statewide sales tax. 

However, Alaska recently adopted their Remote Seller Sales Tax Code. The Code requires remote sellers and marketplace facilitators to register with the commission and collect and remit the tax on their sales into member Alaska localities if the sellers or facilitators have $100,000 or more in annual gross receipts from sales, or 200 or more sales annually into the state.

You can read more about sales tax in Alaska here.

COVID increases States’ Need to find New Revenue Sources

Businesses still struggle with determining whether or not they are required to comply with new sales tax laws. (Don’t forget, you can find out if and where you have economic nexus here!) And states still complain that sales tax compliance has been slow after Wayfair.

Then the pandemic hit… and states began reporting every lower sales tax revenues. 

We asked four sales tax experts how they predicted states would respond to declining sales tax revenues and they predicted that states would get more aggressive in going after non-compliant remote businesses as a result of the pandemic.

On a brighter note, Diane Yetter of YETTER also predicted that states might hold more sales tax amnesties to allow businesses to get compliant without the burden of paying as much in back taxes and penalties. 

Subscribe to the TaxJar blog for more news as states inevitably make their next moves.

Sales Tax: Still a Wild West

The dust has somewhat settled since Wayfair, but SCOTUS’s ruling left the door open for future changes. 

Congress could pass a national sales tax law that once again changes the rules for eCommerce sellers. However, attempts to gain traction with sales tax laws like the Marketplace Fairness Act, the Remote Transaction Parity Act, or the Sales Tax Simplification Act never amounted to much. On top of that, Congress has always been reluctant to interfere in state governance. I suspect that the sales tax system is going to have to be a lot more broken before Congress acts to fix it. 

Some states, like Florida and Missouri, still haven’t made any moves to take advantage of their new taxing powers under Wayfair. And still other states have changed their rules and laws over the past two years. 

Could sales tax change again?

Undoubtedly. And TaxJar is here to help. Subscribe to the TaxJar blog for updates as sales tax news breaks. 

Are you ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works

Schedule time with a sales tax automation expert to look at your specific sales tax needs.

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