Supreme Court Allows States to Require Out of State Vendors to Collect and Remit Sales Tax

In June, the Supreme Court released its decision in the case of South Dakota v. Wayfair, Inc. The Court overturned its prior 1992 physical presence ruling which means states can require out of state vendors to collect and remit sales taxes on sales to individuals located in the state. Under the new ruling, states will be able to require businesses that have a “substantial nexus” with the state to collect and remit sales tax. While the implications are yet unknown, this is a big commercial shift that is relevant for small businesses of all types.

What does it mean for a business to have a substantial nexus with a state such that the state can impose the tax collection and remission burden? The Supreme Court concluded that the South Dakota statute properly addresses the substantial nexus issue as the law only applied to sellers delivering $100,000 in goods and services or 200 transactions annually. Louisiana has already enacted a law like South Dakota’s in anticipation of South Dakota prevailing in the case and it is expected that other states will do the same.

The prior rule was that states could only hold businesses with a physical presence liable for collecting and remitting sales taxes. Therefore, the big online retailers could not be required to collect and remit states sales taxes. In overturning that rule, the Court reasoned that the rule had been established to prevent state tax laws from burdening interstate commerce, but had resulted in giving out of state sellers an advantage over local businesses and that the rule no longer reflected the reality of the global online economy.

Depending on how each state defines which sellers will be subject to the new collection and remission laws, small businesses that rely on online sales may face challenges that the technological solutions may not move quickly enough to resolve. There are already efforts underway to enact requirements setting limits as to which businesses states could apply any new sales tax collection laws.