Changes to Out-of-State Selling Sales Tax Responsibilities for Businesses

by Mary Varano
Product package boxes and shopping bag in cart with laptop computer in the background.

In 2018, a Supreme Court decision in the case of South Dakota v. Wayfair expanded retailers’ responsibilities to collect sales taxes on out-of-state purchases. This decision affects companies selling tangible personal property – including digital property, depending on the state – through a company website to anyone in a different state, despite the selling company having no other connection to the state where their product was purchased.

Many retailers, especially online retailers, are still unaware of South Dakota v. Wayfair and, subsequently, may not be aware of their potential sales tax exposure for states they’re selling in.

What is South Dakota v. Wayfair?

South Dakota v. Wayfair was a legal case that made it to the Supreme Court in 2018. In the case, Wayfair (an online retailer) claimed that they were not subject to sales tax from online sales to South Dakota customers, due to the company’s lack of physical presence in the state.

The Supreme Court ruled in favor of South Dakota, asserting that substantial technological advances seen in the last 30 years, specifically in internet-based commerce, was cause to reverse the physical presence standard set by the1992 case of Quill v. North Dakota. Wayfair, per the Supreme Court, was responsible for collecting and paying sales tax in South Dakota, essentially opening the door for what is now referred to as “economic nexus.”

What is an economic nexus?

Economic nexus is the assertion that a company has nexus in a specific jurisdiction based on substantial economic activity. In the South Dakota case, the Supreme Court upheld South Dakota’s defined substantial economic activity threshold of $100,000 in annual revenue or 200 separate transactions. This has become the standard threshold among most U.S. states (with a few exceptions). If a company exceeds this threshold in a given state, they may be responsible and liable to register, collect and remit sales tax on all taxable sales.

How does Wayfair vs. South Dakota Affect Small Businesses?

Collecting appropriate sales taxes across state lines is a complicated process that is now even more complex. Since economic nexus rules differ from state to state, it is up to the company to analyze their sales tax exposure to determine if and where they should be collecting the appropriate sales tax. This process can often result in companies identifying current and past collection requirements holding them liable for past due taxes along with potential penalties and interest.

Additionally, selling products through a market-place facilitator like Amazon or eBay, often requires a different analysis, as many states have specific market-place facilitators’ rules and requirements

Corrigan Krause Can Help You Navigate Sales Tax Changes

It can be challenging to analyze and determine where your company may have sales tax exposure given these changes. In addition, most states offer voluntary disclosure programs allowing companies to become compliant with sales tax remittance, while limiting the look-back period as well as penalties and or interest that might be due on the back sales taxes. The team at Corrigan Krause can help your business analyze the potential tax implications of South Dakota v. Wayfair on your business, determining if and where you should be filing, if not you’re not already, and what your business is liable for from a sales tax perspective. Email for more information.