The Changing Landscape of Sales Taxes (Segment I)
By Jacob M. Dietz, CPA
“A prudent man foreseeth the evil, and hideth himself; but the simple pass on, and are punished.” Proverbs 13:12
The landscape for collecting and remitting sales taxes is changing. If your business operates in more than one state, consider if you should be making any changes to hide yourself from unpleasant circumstances.
Decades ago, the Supreme Court ruled in the Quill case that merchants did not need to collect and remit sales tax in other states if they didn’t have a physical presence in that state. This exception allowed out-of-state merchants to sell items that would normally be subject to sales tax into another state without collecting and remitting sales tax.
The exception to collection and remission allowed merchants to avoid the hassle of determining if their product was subject to sales tax in a different jurisdiction. For example, just because something is subject to sales tax in Pennsylvania does not automatically mean it is subject to another state’s sales tax. On the other hand, a product that is exempt from PA sales tax is not automatically exempt under another state’s sales tax rules.
The exception to collection and remission also allowed merchants to avoid the time and expense of filing sales tax returns in other states. It takes time to file in other states. Also, it can make a significant difference in the price your customer pays. For example, suppose you are selling a $10,000 item to another state with a 5% sales tax rate. If you do not charge sales tax, then your price is $10,000. Suppose that you have a competitor with a physical presence in that state. They are selling the same item that you are selling, also for $10,000. Since they had a physical presence, however, they need to charge the 5% sales tax rate. If a customer buys from your competitor, they pay $10,500. If they buy from you, they pay $10,000. Merchants with no physical presence therefore had an advantage.
Some states have a use tax for this situation. The use tax would be payable by the customer, so they would still owe $500 of tax, which they should report and pay themselves. The merchant would not need to bother with it. Unfortunately, compliance with use tax is low.
The Great Change
We have been addressing the past, but there has been a great change. South Dakota wanted tax money, and they passed a law to collect sales tax from out-of-state vendors even if they did not have a physical presence in the state.
The South Dakota law, however, did not require every out-of-state merchant to collect and remit sales tax. It used the threshold of $100,000 sales and 200 separate transactions. Therefore, an out-of-state merchant that sold $10,000 of products into South Dakota in 10 separate transactions would not be required to collect and remit sales taxes under South Dakota’s law.
This law, even with the threshold, contradicted the Supreme Court’s rulings in the past, so this law came before the Supreme Court. The Supreme Court sided with South Dakota in a 5-4 ruling. In South Dakota v. Wayfair, Inc., the Court overturned its decades old precedent requiring physical presence for the collection and remission of sales taxes.
How Will This Case Affect Businesses?
If a business is selling into another state, even without a physical presence in that state, it is possible that the business will be subject to sales tax in that state. Note that it is possible, it is not guaranteed. It depends on the specifics of the situation.
This article is general in nature, and does not contain legal advice. Please contact your accountant to see what applies in your specific situation.
To be continued……