The US Supreme Court decided on June 21, 2018, that states and local governments could require online retailers to collect online sales tax even if they don’t have a physical presence in the local tax jurisdiction.
In South Dakota v. Wayfair Inc., the court left it up to US Congress to pass legislation to streamline implementation but that has not yet happened.
After some initial confusion, online retailers realized they needed to start planning for a new world of taxation reality to arrive at their virtual storefronts starting October 1.
Navigating the brave new world of state taxes
Hawaii, Maine, Oklahoma, and Mississippi already have online sales tax laws in place and starting today (Oct 1), 10 new states have tax laws in effect for catalog and online sellers.
The 10 new states include Illinois, Indiana, Kentucky, Massachusetts, Michigan, Minnesota, North Dakota, Washington, and Wisconsin. Connecticut and Iowa go into effect soon.
Navigating as many as 13,000 local tax jurisdictions is going to be a challenge for many small online sellers and e-commerce businesses.
As Digitalcommerce360 reports, “Two of the 45 states that collect sales tax have laws that enable them to expand their tax collection beyond the physical presence standard vacated in the Wayfair decision, according to the Tax Foundation. And several states have already begun requiring out-of-state retailers to collect and remit sales tax, while a couple are engaged in litigation as they seek to require merchants to remit sales tax retroactively.”
Some retailers are moving fast to be compliant with new tax regulations while other businesses wait to take action despite the clear court decision.
Clear as mud
Some retailers are hoping for clarity from Congress, new potential court challenges and Amazon but don’t hold your breath for this to be sorted out any time soon.
Leon Rbibo, president of The Pearl Source, a Los Angeles-based jewelry e-retailer that’s been selling online for 12 years asks, “How is a normal small business owner supposed to educate himself about the sales tax laws in every state?”
Research shows only 163 of the top 500 e-retailers collected sales tax on purchases made by the 870,000 South Dakota residents last year.
While South Dakota has a $100,000 threshold before taxes need to be collected, it will not impose taxes retroactively. The other states are an entirely different and uncertain status at this time.
NRF tax reference guide
The National Retail Federation (NRF) offers a preliminary tax guide for retailers, effective September 28, 2018. A first glance at the guide shows how incomplete, wide-ranging and inconsistent application of new taxes for online sales is at this stage.
Some states have enacted legislation, others are still in progress. Many states have thresholds ranging from $100,000-$500,000 annually and from 100 to 200 or more annual transactions before taxes need to be applied.
Initially, some states have not yet passed legislation or put regulations in place, leading to a very confusing state of affairs for online sellers.
One thing is certain. There will be a direct cost to business to comply with new state taxes on sales to residents in local jurisdictions. Let’s hope states do the obvious to work with Congress and other states to streamline and coordinate regulations and implementation.
But don’t wait to put systems into place to collect taxes on your online sales. There’s too much money at stake that states want to collect for education, infrastructure, and other programs and they’re going to be very determined to get their hands on it.