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On June 21, 2018, the Supreme Court of the United States issued a 5-4 ruling in the case South Dakota v. Wayfair. Their decision changed the parameters for States to require an online or out-of-state business to collect sales tax in a state. Gone are the days when a business needed to have a physical presence in a State in order for the business to be required to collect sales tax.

Issue: Sales Tax

The Wayfair decision essentially provides a roadmap for States to generate additional revenue from sales tax by being able to tax online and out-of-state businesses. The new map as outlined by the Supreme Court said a State Legislature’s statute regarding online (or out-of-state businesses) sales tax collection will be upheld in the Courts if:
1. The statute contains a threshold that recognizes a substantial connection between the business and the State. In Wayfair, the Supreme Court upheld the South Dakota statute which set the threshold at 200 separate transactions or $100,000 of in-state sales.
2. The statute contains a provision prohibiting the retroactive collection of back taxes based on the new law.
3. The State is a member of the Streamlined Sales and Use Tax Agreement (SSUTA).

What is the SSUTA?
The SSUTA was created in the fall of 1999 by the National Governor’s Association and the National Conference of State Legislatures to simply sales tax collection. In the words of the Supreme Court, “This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.”

What does this mean?
From a state perspective, we expect a lot more states to enact legislation that follows the roadmap outlined above. Currently, 21 States have laws on the books requiring online/out of state businesses to collect sales tax if their sales exceed a certain threshold. It is likely that some of these laws will be changed to better mirror the South Dakota statute. Time will tell if more states join the SSUTA and if not joining the SSUTA will be detrimental for a State trying to enforce their sales tax collection efforts on out of state businesses.
A business owner will need to become more vigilant regarding their online and out of state sales to remain compliant with their State sales tax collection responsibilities. This will require more resources as you set controls in place to monitor compliance.
A purchaser (individual and business) need to understand that they may be paying more sales tax at the time of purchase as more states implement and enforce new sales tax collection rules on online and out of state retailers.

The sales tax environment has changed significantly in the past month and continues to evolve. The State and Federal legislatures are busy analyzing the impact of the Wayfair decision and are considering legislative changes and issuing guidance as appropriate. Businesses are also reviewing their operations and the impact this decision will have on their sales tax collection responsibilities. Now would be a good time to consult your sales tax advisor to determine how the Wayfair decision may impact you.

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