Time to Pay More Sales Tax - Wayfair vs. South Dakota

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    Wallet being squeezed by a vice

    This post is not about content management but legal proceedings that affect many of our customers. I figured I’d share my thoughts and conclusions to clarify the ruling.

    Recently, the United States Supreme Court, in South Dakota v. Wayfair, Inc., ruled that states can enforce the collection of sales tax by out of state businesses that ship goods to locations within the state. This overruled a 1992 ruling, Quill Corp. v. North Dakota, that said a business had to have a physical presence within a state in order for the state to enforce the collection of sales tax.

    This ruling will certainly be challenged in court and will probably not be fully resolved for a very long time. If fully enforced, however, without challenge or alteration, the landscape will certainly look very different for both consumers and businesses alike.

    What this means for states

    States may see a windfall of new tax revenue that has previously been inaccessible to them due to the Quill vs. North Dakota ruling. It is estimated that states will see as much as $33 billion in new tax revenue.

    As for Indiana, “A 2017 study published by the University of Tennessee concluded that Indiana lost $195 million in 2012 in uncollected sales taxes. That figure is likely much higher now, experts agree.” Schoettle, A. (2018, July 3rd), Local firms bristle at Supreme Court sales tax ruling. That’s a lot of dough for Indiana.

    The total sales tax losses, however, have been disputed by some claiming that many top online retailers, including Amazon, Walmart, Zappos, etc already collect sales tax for most states so additional tax revenues will mostly come from smaller online sellers resulting in a significantly lower estimate.

    What this means for consumers

    Consumers who purchase online regularly will see all of their purchases taxed at their current state and local tax rates. In Indiana, we have just one general sales tax of 7%. But there are additional taxes that are dependent on the type of goods you are buying and your locale. For example, if you buy tires you must pay an additional 25 cents per tire. If you rent rooms for less than 30 days, you must pay a county innkeeper’s tax and that rate depends on the county in which you rent the room. We also have a food and beverage tax that depends on the county as well.

    Amazon.com already collects sales tax in Indiana but there are thousands of other sites that do not. If you’re a Hoosier, all those past orders where you didn’t have a sales tax just went up at least 7%.

    Additionally, in this ruling, the South Dakota law specifies no retroactive sales taxes can be collected but that does not apply to all states. The Supreme Court ruling does not explain or deny the same condition for other states, meaning, other states may opt to collect sales tax on prior orders. I don’t know what this will look like for consumers but there could potentially be legal actions taken by the state to collect sales taxes on your past orders.

    What this means for business

    Businesses may have a great deal of work to do with some hefty up-front and annual investments. Determining state and local tax rates can be a daunting task.

    Consider Indiana again. Indiana collects a flat 7% sales tax but has seven categories of goods or services that require an additional tax. The Food & beverage tax, for example, indicates 26 various city or county level taxes. If a winery in Washington sells to a customer in Noblesville, IN, the total tax increases to 8% (Noblesville has a 1% additional F&B tax). If that same winery sells to someone in Paoli, IN, they must charge 9% in sales tax (Orange County, within which the town of Paoli is located, has a 2% additional F&B tax).

    In California, there is a flat state tax and over 200 local tax districts. In El Cerrito, CA, for example, there are five tax rates that apply:

    • 7.25% - State Tax
    • 0.50% - Bay Area Rapid Transit District (BART)
    • 0.50% - Contra Costa Transportation Authority (CCTA)
    • 1.00% - City of El Cerrito 2015 Transactions and Use Tax (ELCG)
    • 0.50% - City of El Cerrito Street Improvements Transactions and Use Tax (ECSI)

    Total tax = 9.75%

    Keeping track of state tax rate changes, local tax laws by county, city, or other area, and special taxable product or service groups creates thousands of potentially different tax rates. And these change every year.

    Throw into the mix the fact that a state like South Dakota only requires you to collect sales tax if you sell over $100,000 to that state during a calendar year. What if you’re close? Let’s say last year your revenue from South Dakota was $85,000. No need to collect sales tax but that doesn’t mean this year will the same. At what point do you just start collecting sales tax? What if you estimated under $100,000 but had a boon in business and went over by a couple thousand? Do you need to go back and charge sales tax to all customers having orders without a sales tax?

    As you can see, there are huge implications to businesses to keep track of sales tax and collect the proper amounts. Non-compliance just might get you sued.

    What do we do?

    Disclaimer - I’m not an attorney and I don’t even play one on tv. This is just my opinion and I recommend you seek the advice of an experienced tax attorney or CPA. But I’m not sure they’ll even understand what’s going on at this point.

    If you sell products, the safest thing is to just start collecting sales tax on every sale for any state. Reporting and filing in every state within which you conducted business is going to be a major pain. Unless you have an army of CPA’s you’ll need to use an outside service, like Vertex or Avalara. These services maintain current tax rate tables, provide transactional lookup functionality, and process tax returns for you.

    If you sell services, you’ll need to consult with your CPA and/or attorney. For a company like Marketpath with subscription software services, it wasn’t even clear in Indiana, until recently, whether or not we should charge a sales tax. The law was confusing and its examples didn’t help much.

    Final Thoughts

    Sales taxation in the United States just got more cloudy, confusing, and challenging for everyone who conducts online sales. Every state and locale has a different rate and some have more than one. Knowing what to tax and when to tax it for every taxing area will be a constant thorn in the side of online sellers.

    Justice Kennedy, in his opinion under section II, even wrote:

    But this Court has observed that “in general Congress has left it to the courts to formulate the rules” to preserve “the free flow of interstate commerce.”

    This basically means that congress is not going to act and clarify the laws which leaves it up to the courts, through judicial proceedings, to rule by opinion and decree.

    And that will take years.

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    About the Author

    Matt Zentz

    Matt Zentz launched Marketpath from a small Broad Ripple bungalow in February 2001 with a focus on custom web application development. He built the first, basic version of a hosted CMS called Webtools and shortly afterward expanded his team and created the first version of Marketpath CMS.

    Matt has worked for a national consulting firm, taught computer programming to high school juniors and seniors , and led the information technology arm of the auxiliary business units at Indiana University.

    Matt graduated from Indiana University in 1999 with a B.S. in Computer Science and has built custom web applications since 1995. Matt is husband to an amazing & supportive wife, has three beautiful children, supreme master to Archimedes (Archie) the dog, and mostly tolerant victim of 2 flying rats (cockateils).

    He coaches various kid sports, enjoys furniture and home renovation projects, and plays guitar and piano. Matt is also active with his church as a parishioner, technical advisor and board member on the festival committee.

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