South Dakota v. Wayfair: A Primer For More Complicated Sales Tax Collection

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More than 12,000 tax jurisdictions exist in the United States. Whether and how a seller is supposed to handle taxes in each of those jurisdictions varies. And a recent U.S. Supreme Court decision just changed the rules.

There’s no doubt about it: sales and use taxes are complicated.

And they are more complicated now thanks to a recent U.S. Supreme Court decision that allows states to tax out-of-state sellers. Get a handle on the South Dakota v. Wayfair decision and what it might mean for your company.

What Did South Dakota v. Wayfair Change?

States now can set ‘economic nexus’ thresholds that require out-of-state sellers to collect and remit sales tax.

South Dakota v. Wayfair centered on whether or not a state can tax out-of-state sellers. The decision was that states can.

What changed is tax "nexus.” A company with nexus in a given jurisdiction is required to collect and remit taxes in that jurisdiction.

Nexus had been a physical nexus only: Have a physical presence in the state, then collect and remit sales and use taxes in the state.

South Dakota v. Wayfair established an additional nexus, an economic nexus: Sell in the state, even remotely by ecommerce, and you may be required to collect and remit sales and use taxes.

What Counts For This New ‘Economic Nexus’?

The closest to an emerging uniform standard is $100,000 in annual revenue and/or 200 annual transactions in a given state, but the standards vary – widely – and companies need to check the standards for each state in which they sell.

Economic nexus varies – widely – from state to state.

It’s based on sales revenue, transaction volume, or a combination of both. In other words, sell enough in a given state, and you are required to collect and remit taxes there. But every state can set its own standards.

The most common standard used by approximately 20 states is that – very roughly – $100,000 or more in annual sales and/or 200 or more annual transactions count as economic nexus. That’s the standard used by South Dakota, and the closest to an emerging uniform standard.

There are also 23 states partnering in the Streamlined Sales and Use Tax Agreement (SSUTA) moving toward standardization.

However, even the states using the $100,000/200 standard have caveats like overall revenue versus retail revenue. And even the SSUTA states have varying sales and transaction thresholds.

Always check on an individual state’s standards. The SSUTA has a state-by-state list of economic nexus thresholds, for example, but it should never replace checking into the law in a given state.

What’s The Bottom Line From South Dakota v. Wayfair?

It’s not the decision businesses hoped for.

The decision reached in South Dakota v. Wayfair is not the one that businesses hoped for.

It ratchets up compliance costs and management, effectively makes products more expensive, and overall is a lot of complication to sort through.

Each company will need to look into the standards for each state in which it sells, and then determine if the company meets economic nexus. If it meets the nexus, the company will need to register with the state and then take several more steps to collect and remit sales tax.

Every state is likely to use the South Dakota v. Wayfair ruling to establish economic nexus standards that boost state revenue, as tax and financial writer Mark Battersby writes in PPB Magazine.

Businesses, he writes, "now – or soon will be – responsible for keeping track of the ever-changing sales tax laws in every state where they have ‘economic nexus’ in order to ensure compliance.”

Tags: accounting, tax