You\u2019ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors. And state and local governments are pleased to potentially be able to collect more sales tax.<\/p>\n
But for businesses with out-of-state online sales that haven\u2019t had to collect sales tax from out-of-state customers in the past, the decision brings many questions and concerns.<\/p>\n
What the requirements used to be<\/strong><\/p>\n Even before Wayfair, a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a \u201csubstantial nexus\u201d \u2014 or connection \u2014 with the state. The nexus requirement is part of the Commerce Clause of the U.S. Constitution.<\/p>\n Previous Supreme Court rulings had found that a physical presence in a state (such as retail outlets, employees or property) was necessary to establish substantial nexus. As a result, some online retailers have already been collecting tax from out-of-state customers, while others have not had to.<\/p>\n What has changed<\/strong><\/p>\n In Wayfair, South Dakota had enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit sales tax. The Supreme Court found that the physical presence rule is \u201cunsound and incorrect,\u201d and that the South Dakota tax satisfies the substantial nexus requirement.<\/p>\n The Court said that the physical presence rule puts businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn\u2019t charge customers for taxes.<\/p>\n In addition, the Court found that the physical presence rule treats sellers differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to sales tax on all of its sales in the state, while a business with a pervasive online presence but no physical presence isn\u2019t subject to the same tax for the sales of the same items.<\/p>\n