On June 21, the Supreme Court decided that states can force out-of-state retailers to collect state and local sales tax on goods and services shipped to in-state residents. South Dakota v. Wayfair, Inc., ___ U.S. ___ (2018). In a 5-4 decision, the Court upended 26 years of precedent and ruled that out-of-state retailers could be forced to collect a state’s sales tax even if the retailers did not have any physical presence in the state.
It is important to note, that South Dakota law did allow the very small retailer to escape the burden of tax collection and this likely allowed the Court to rule favorably for the State. South Dakota allowed retailers with annual sales in the state of less than $100,000 or fewer than 200 transactions in the state to avoid the burden of sales tax collection. In addition, South Dakota provided that the Wayfair decision would not be applied retroactively.
Considering the Supreme Court’s Wayfair decision, Internet retailers should review their sales tax collection policy and make changes to reduce their exposure going forward in states where sales activity is material. Sales tax law imposes a major burden on retailers because 47 states (including Washington DC) impose a sales tax. In some states, the sales tax is collected locally (by city or county), in addition to state tax collection rules. For a retailer that makes sales everywhere in the US, the retailer can expect to file many hundreds of tax returns in a year. Most states impose personal liability on the managers of the retailer if the retailer fails to collect or under-collects sales tax. In some states, if the retailer over collects-sales tax it can face the possibility of a class action lawsuit or a consumer law violation. Finally, each state has special rules about how the sales tax must be billed to customers. For example, in California, it is very difficult for the retailer to late bill the customer for the sales tax once the sales invoice has been issued.
The nuances in the sales tax area make tax collection very complicated. There are 47 different rules for handling sales tax exemption forms. About half the states make the retailer handle sales tax refund claims filed by the customer, rather than forcing the customer to deal directly with the state department of revenue. It can be very difficult to determine the proper local tax rate for a particular sale. About four to six percent of the US use post office boxes, not street addresses, to receive shipments. In the remaining portion of the US, zip codes areas often overlap multiple local taxing jurisdictions. Finally, for customers who buy digital products with a credit card, the retailer may have only a five-digit billing zip code that cannot distinguish between multiple local taxing jurisdictions.
It is expected that Congress will reduce the sales tax collection burden on the out-of-state retailer in two or three years by passing a law similar to the “Marketplace Fairness Act of 2017” (Current version is S. 976) to force simplifications and allow an exemption for small retailer (the SB bill exempts retailers from collecting sales tax in a state if the retailer’s total sales are less than $1M). However, until Congress does reform the sales tax collection rules, it is important for internet retailers to focus on risk minimization.
If you would like help minimizing sales tax risk or working with outside service providers who sell access to local rate tables by zip code or who prepare sales returns, Strassburger McKenna Gutnick & Gefsky can help you. Please contact John Kelly, firstname.lastname@example.org at (412) 281-5423 for help with tax matters. This post is provided for informational purposes only. Nothing in this post creates an attorney client relationship.