Executive Summary
- The Supreme Court upended the interstate sales tax landscape in 2018 with South Dakota v. Wayfair.
- In short, if you have an “economic presence” in a state, not just a physical presence, you may be obligated to collect sales tax for shipments to that state.
- South Dakota set the “economic presence” standard as 200 transactions or $100,000. Most states are using similar guidelines.
- There are software providers that can interface with your e-commerce or invoicing software and correctly calculate sales tax in all jurisdictions.
- The Streamlined Sales and Use Tax Governing Board offers free calculation and filing services for “volunteer sellers”.
Panic has spread amongst the ecommerce retailers across the country as a result of last summer’s South Dakota v. Wayfair.What do I do? How do I manage it?
“Economic Presence” v. “Physical Presence”
In case you missed it, South Dakota v. Wayfair was the Supreme Court case in July of 2018 that upheld South Dakota’s law that required out-of-state retailers to collect sales tax on sales in their state. Previously, courts had held that states could only require the collection of sales tax by businesses with a physical presence in the state. This ruling expanded the presence to “economic presence.”
What Do I Do?
First, take a deep breath. If you are a small internet retailer, you probably don’t have to do anything differently as a result of Wayfair. South Dakota defined “economic presence” as a minimum of 200 transactions or $100,000 in revenue in the state. Most states that have implemented similar sales tax laws have used the same minimum.
Now, if you are a larger retailer, then you probably already sell into some states in which you transact that much business. You do have an issue, but it is not insurmountable.
First, identify which states you have transacted at least 200 transactions or $100,000 in the prior year or current year. Also include states in which you will most likely hit that threshold in the next 6 months.
Streamlined Sales and Use Tax Governing Board can Help
Check out a site called the Streamlined Sales and Use Tax Governing Board at https://www.streamlinedsalestax.org. If any of the states on your list are part of this agreement, you can register for a sales tax permits through this organization, saving you from registering with each individual state. This organization started in 2000 with the mission to make create uniformity among the states sales and use tax laws and registrations. To date, twenty-four states have adopted the Streamlined Sales and Use Tax Agreement (SSUTA).
Unfortunately, there are twenty-six states that have not agreed to participate in SSUTA and most of the heavily-populated states are in this category: California, Florida, Pennsylvania, Texas, and New York. In these states, you will need to register for a sales tax permit with the State’s Department of Revenue or Department of Taxation. (In Texas, it’s the Comptroller’s Office.)
Technology Tools for Sales Tax
Next, you will want your e-commerce or invoicing software to correctly calculate the sales tax to charge in these states. There are software vendors that can help you do this. Most of the products will also generate reports to help you file your sales tax and some also provide the service of filing the sales tax for you. And like most things, the more you pay, the more services and features you will get.
Here are a list of the sales tax computation providers that I know of:
They all work under the same principle— you code all your products using the software’s sales tax categories and the software will compute the sales tax rate per product based on the customer’s shipping address. The only one I have personally used is Avalara. However, at the time it was also one of the more expensive solutions. My advice would be to look for one that interfaces well with your invoicing solution, is easy for you to set up and maintain, and is affordable.
In terms of affordability, the Streamlined Sales Tax Governing Board offers free sales tax calculation and filing for “volunteer sellers” in streamlined states through their “Certified Service Providers” or CSP’s. If you qualify, the states compensate the CSP’s instead of you. All of the providers listed above, with the exception of the two solutions with asterisks (*), are CSP’s. Read more about how to qualify here. This is a great program to increase you tax compliance while reducing your compliance costs.
Conclusion
South Dakota v. Wayfair created huge changes in the ways states legislate interstate commerce. Be aware of the states you are selling into and any legislation they have passed as a result of the Wayfair decision. Then enlist a good software provider to handle the calculation of sales tax. Then you can focus on growing your business without the specter of old sales tax issues following you.
