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New Sales Tax Laws for Online Sellers

July 29, 2018

If you sell products online, you may or may not know about the new sales tax laws that started to go into effect last month. On June 21st, 2018, a Supreme Court ruling in South Dakota v. Wayfair, Inc. changed how sales tax is collected between different states. This is something that hasn't been touched since 1992. The Supreme Court decided 26 years ago that states couldn't collect sales tax from out-of-state sellers that didn't actually have a physical presence (for example, a storefont, office, or warehouse) within that same state. Many online interstate sales have been tax-free since. The latest ruling has now changed that.

I was actually very surprised to hear the news of the ruling. I hadn't heard anything about internet sales tax being up for debate and didn't realize anyone was trying to close a loophole that has been out there for years. That now defunct loophole was as such: If an online company didn't have a physical presense (also known as a nexus) in a certain state, it wouldn't have to collect sales tax from customers in that state. However, if the sellers were only internet-based, they could potentially run their business tax free. Brick-and-mortar stores have complained about this unfair advantage online sellers have had. A Supreme Court Justice said the 1992 ruling caused states to lose up to $33 billion in annual tax revenues, and the ruling last month could bring $13 billion a year of new tax revenues.

News of this ruling also caused me to ask an important question: What does this mean for the ecommerce sites my clients and I operate? Well, for now, it means every single state, county, and/or municipality could collect their own sales tax for purchases made online. In addition to our 50 states who could start collecting the tax, there are approximately 19,500 cities (not including townships) and 3,000 counties in the United States (as of a 2012 count by the U.S. Census Bureau). This potentially means sellers have to calculate and pay sales tax that is owed with each of those states, counties, or municipalities that create new tax laws. If you're a seller in Joshua Tree, Calfornia and you sold a product online to someone in New York state, you have to contact that customer's state, county, and/or municipality and pay that sales tax. The seller would have to repeat this process for every single online order from customers in states that create new sales tax collection laws.

When I first heard about the ruling back in June, there wasn't much talk about it. Honestly, there hasn't been much to do as we wait for each state, county, and municipality to decide what they are going to do, if anything at all. This is new to everyone with the exception of a few states. South Dakota already had a law in place requiring merchants to collect a sales tax if they had more than $100,000 in annual sales from South Dakota customers or exceeded 200 transactions in that state. Prior to the ruling, Washington State and Pennsylvania already enabled sales tax collection from internet sellers. North Dakota has a similiar law in place now, and more states are on their way. Additionally each state, county, and municipality could retroactively collect sales tax back to June 21, 2018 should they decide to do so. Whether a state determines now or later, online sellers have a lot of work ahead of them.

It's been relatively quiet out in the internet world about this ruling. However, this week, I received an email from Etsy with the subject line "How new laws impact state sales tax on Etsy". That email stated Etsy was going to start collecting sales tax on orders shipped to Oklahoma and informed that they already do this with all orders to Washington and Pennsylvania. They have a guide that goes into detail on the new sales tax laws.

Right now the ruling has left everything wide open for states to basically do whatever they want when it comes to collecting online sales tax. The process to collect and pay from one state to another is complex or non-existant. There is a lot that is still unknown or undetermined. So far, to weed through the mess, I've seen this one consistent piece of advice given to online sellers: "If you’re unsure what your responsibilities may be, we encourage you to consult an accountant or other experts in your area." (quoted from Etsy)

So what needs to happen? The federal government needs to provide an answer that is uniform and not complex for all online sales tax collection. Etsy agrees. They have dedicated a page on their site to have users sign a petition to Congress for a simple and fair tax solution. Congress needs to act now to implement national laws or this mess will be very difficult to contain and hurt small online businesses, start-ups, and entrepreneurs. For now, online sellers should start paying attention to what new state laws get passed. I am going to be on the lookout for a cumulative state tax law list and hope to post it in a future blog.

More helpful reading: "What Does the Wayfair Decision Really Mean for States, Businesses, and Consumers?" from Tax Foundation (non-profit)