Old Law:
Prior to the Wayfair decision, vendors were subject to the rules that stemmed from a 1992 court case, Quill v. North Dakota (“Quill”). Under Quill, a vendor was only required to collect sales tax if they had a physical presence in the state in which the buyer was located (i.e. they had property or payroll in the state). Many online retailers who sold goods to consumers in other states, but who lacked a physical presence in that state, didn’t have to collect sales tax. It was the responsibility of the consumer (purchaser) to voluntarily pay the required use tax to their state of residence. A majority of consumers did not remit their use tax obligations.
New Law:
Under Wayfair, the Supreme Court has effectively overturned the Quill case, thus removing the physical presence requirement for a vendor to collect sales tax. Out-of-state vendors will now be required to collect sales tax on goods sold within other states in most cases, even if they lack a physical presence within that state. Online consumers will now also pay sales tax on virtually all of their online purchases. Under the South Dakota law that Wayfair was challenging, there was a minimum threshold of either $100,000 of sales or 200 sales transactions, so, under this standard, smaller online vendors would be exempt from the requirement to collect sales tax.
Impacts:
As a result of the Wayfair decision, states will be allowed to update their regulations and tax codes to reflect the overturn of Quill. As mentioned above, the Wayfair decision was related to South Dakota’s sales and use tax regulations. Thus, it may not directly apply to all the states. Each state will have to decide how they will proceed going forward. The various states will have to decide how they choose to address this new standard. Presumably, all states that charge sales tax (there are 45 of them plus the District of Columbia) will enact some modification to their laws permitting collection of sales taxes on out-of-state sales. Whether they choose to adopt the same thresholds as South Dakota remains to be seen.
Another potential issue is if states decide to apply this ruling retroactively. South Dakota has confirmed they only want future sales to be impacted, but other states may attempt to collect on prior sales.
Do you sell goods into states where you don’t have a physical presence? Be aware that you may be impacted by the Wayfair decision. At a minimum, you should watch the legislative activity of each state in which you deliver your products so you’ll know if and when you are subject to a new set of rules.
Do you purchase online goods? You may have a very short window before vendors begin collecting sales taxes on our purchases. Be on the lookout for sales tax charges that you may not have had to pay in the past!
If you have questions about this or any other tax topic, please contact the tax professionals at Zinner & Co. at 216.831.0733. We’re here to help and ready to start the conversation.