If your business sells its products or services across state lines, the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair may have a significant impact on your sales tax obligations. Previously, states could not require out-of-state sellers to collect sales tax unless they had a physical presence in the state, such as retail outlets, offices, employees, manufacturing facilities, or distribution centers.
In Wayfair, the Court ruled that even a “virtual” presence is enough. The South Dakota law reviewed in that case applies the state’s sales tax laws to sellers that 1) deliver more than $100,000 in goods or services into the state annually, or 2) engage in 200 or more separate transactions for the delivery of goods or services into the state. According to the Court, this level of activity is sufficient to demonstrate that “the seller availed itself of the substantial privilege of carrying on business in South Dakota” and, therefore, is within reach of the state’s sales tax laws.
What Does This Mean for Your Business?
The Wayfair decision doesn’t necessarily require you to begin collecting sales tax from customers in every state in which you sell your products or services. Your obligations in a particular state depend on whether 1) the state has passed a law similar to South Dakota’s, and 2) your business’s sales in the state exceed applicable thresholds. Note, however, that in the wake of Wayfair, most states have passed such laws or are considering them.
Even if you don’t do business in other states, Wayfair may have an impact on your purchases of equipment, materials, or supplies from out-of-state sellers. Why? Because if your state has passed a law imposing sales tax obligations on sellers without a physical presence in the state, your out-of-state vendors may begin collecting sales tax from you. And if your purchases qualify for a sales tax exemption — such as a manufacturing or resale exemption — then you’ll need to present your vendors with an exemption certificate in order to avoid the tax.
All businesses should review their interstate sales and purchases to determine whether their sales tax obligations have changed as a result of Wayfair. If you do business in states that have expanded the reach of their sales taxes, pay attention to the effective or enforcement dates of any applicable laws to ensure that your business complies with them on a timely basis. If that date has already passed, investigate whether the state offers voluntary disclosure agreements or other procedures for limiting your liability for past sales.