Since the US Supreme Court’s June 21, 2018, decision in South Dakota vs. Wayfair, Inc. , many of the 45 sales tax-collecting states have been making moves to put laws and processes in place for tax collections for out-of-state online sales. Given the general complexity of state tax laws and the inconsistency from state to state, as well as the uncertainty as to whether or when uniformity across states may come to pass, businesses with online sales need to carefully monitor both the legal landscape and the processes established for administration and compliance for out-of-state transactions.
Prior to Wayfair, a state could only tax businesses with a physical presence in that state. But Wayfair has changed the standard, with the Supreme Court finding that the respondents’ “economic and virtual contacts” with South Dakota were a sufficient basis to establish a substantial economic nexus. Since the decision, any state could begin taxing online retailers of goods and services for any nonexempt sales to consumers within that state.
For a full discussion of Wayfair, please read our LawFlash: Supreme Court Overturns Physical Presence Standard for Establishing Sales Tax Nexus
State Laws Taking Effect
Under South Dakota’s law that was at issue in Wayfair, a remote seller would have economic nexus and have to remit sales tax if applicable gross revenue from sales totaled $100,000 or more in the state, or if it had 200 or more transactions in the state. Gross sales or transactions include the sale of tangible personal property, any products transferred electronically, or services. These thresholds also apply to “marketplace providers” that may facilitate sales, provide fulfillment services, or provide virtual classified ads for businesses selling into the state.
Other states have passed similar laws for remote sellers, but the thresholds may be more or less, or the definition of sales transactions may vary, with certain sales exempt altogether. For example, New York’s law (which applied to sales facilitated by marketplace providers or after June 1, 2019), applies to those vendors outside of the state that annually collect more than $300,000 in sales and have more than 100 transactions in state. California’s Department of Tax and Fee Administration’s guidance became effective April 1, 2019, and requires out-of-state sellers to collect taxes if annual in-state sales grossed $100,000 or more or totaled 200 or more. Other states, like Colorado with sales taxes collected by various localities, still have not finalized updating their laws/regulations to implement Wayfair.
States’ Relationships with Certified Service Providers
At this stage, many retailers must regularly track sales levels and remain up-to-date on the various tax law changes in all states in which they do business. To facilitate tax collections, states have been taking steps to relive the administrative burden on online retailers. Under the Streamlined Sales and Use Tax Agreement (SSUTA), certified service providers (CSPs) provide tax compliance and administration functions for remote sellers and marketplace providers allowing for them to outsource complex state sales tax responsibilities. In SSUTA member states, CSP services are provided free to sellers and each member state certifies the accuracy of the software and provides relief from liability for applicable tax miscalculations. South Dakota is (and was at the time of Wayfair) one of the member states.
But what about retailers selling in the other states that are not SSUTA member states?
Currently a handful of these states, such as Pennsylvania, are actively working with some of the SSUTA-certified CSPs to put programs in place similar in structure to those available for SSUTA member states. Pennsylvania has been finalizing agreements with certain CSPs to have these systems made available to remote retailers by July 1 (which is also Pennsylvania’s economic nexus statute effective date). These services would also be available to these retailers at no cost. New York and Illinois may be following Pennsylvania’s lead, but no formal reports of active negotiations with CSPs have been made.