In its June 21st landmark decision South Dakota v. Wayfair, Inc., the Supreme Court of the United States overturned the physical presence test for sales tax. Most businesses have relied on this test to avoid collecting sales taxes from out-of-state customers.
The Wayfair case was started back in 2016, when South Dakota passed legislation requiring that out-of-state sellers with more than 200 customers in the state or in-state sales above $100,000 annually collect and remit sales tax. This law was challenged by Wayfair, a remote seller with no physical presence within South Dakota, with the case ultimately ending up in the U.S. Supreme Court.
In Wayfair, the Supreme Court overturned the 1992 case of Quill v. North Dakota. According to the Quill decision, a state only had a right to require sales tax compliance if a company had “significant physical presence” in the state.
What does this decision mean for small businesses? The Wayfair opinion means out-of-state sellers may be required to collect sales taxes in states where they do not have a physical presence. This decision could also lead to other states enacting sales tax legislation similar to that of South Dakota’s, impacting those businesses that sell products or services in multiple states. Not only will brick-and-mortar and online retail businesses be affected, but manufacturers, distributors, contractors, software developers, and professionals may fall under this ruling.
Connecticut, the most recent state to enact sales tax legislation, targets out-of-state sellers with $250,000 in Connecticut gross receipts and 200 or more retail sales into Connecticut annually. Several states have also enacted detailed notice and reporting laws for out-of-state sellers. Many of the rules are cumbersome and impose stiff penalties for noncompliance.
Now more than ever, companies need to consider the sales tax and reporting requirements in every state where they do business.
Please contact Wouch Maloney & Co LLP, if would like additional information about this court decision or for assistance with any tax, financial or accounting matter.