On June 21, 2018 the Supreme Court ruled that South Dakota can tax out-of-state companies for internet sales made to its residents. The judgment in South Dakota v. Wayfair, Inc., Overstock.com, and Newegg Inc. is a major change from the state of play for the past two and a half decades.
What is South Dakota versus Wayfair about?
In a nutshell, it’s about revenue, specifically all the sales tax revenue South Dakota was missing out on from internet sales. The first time the Supreme Court took this issue on, in the 1992 case of North Dakota versus Quill Corp., the Court ruled that states could only require sellers to pay sales taxes if the companies were based in their state or maintained a “physical-presence” — think property, people, or some other physical connection — there. This rule allowed out-of-state companies selling online to avoid paying state sales taxes, benefitting their cash flow and giving them a pricing advantage over in-state companies that did have to pay sales taxes.
Last year, South Dakota sued Wayfair, Overstock, and Newegg to get them to pay taxes on sales they make to customers in the state. It argued that though none of the companies are based in South Dakota, the thing that should really matter is the amount of sales they make to in-state customers. South Dakota claimed that by not paying the state’s sales taxes, the companies hurt its bottom line and “brick-and-mortar retailers.”
What happens now?
Many states are likely to move quickly to impose taxes (some already have). But it could take time for things to play out. For the moment, the Supreme Court’s decision applies only to South Dakota’s tax on internet retailers. And South Dakota’s law applies only to retailers generating at least $100,000 in annual sales or 200 transactions a year in the state. Still, based on this major change, we expect several things to happen.
Three implications for startups and small businesses
Most states will follow South Dakota’s lead, drafting laws to impose taxes on remote/online retailers. Laws that are too broad will almost certainly be challenged in court, and some will probably get shot down. In general, expect the long arm of the taxman to stretch further, with states (and localities) looking to increase their tax revenue by using South Dakota’s law as a model. We expect:
- Compliance costs to increase for small businesses and startups
- Companies to need help planning for taxes and navigating tax compliance and reporting requirements in multiple jurisdictions
- Competitive dynamics could shift as out-of-state sellers lose an advantage over in-state ones
How to get ready
Now that you know about the changes, getting systems in place to make sure you are set to meet your reporting and payment obligations, manage cash flow, and avoid penalties for non-compliance is key. If you’re not already working with an outsourced CFO, building a relationship with a firm that has worked with businesses similar to yours can offer so much more than just blocking and tackling. Whether it’s managing your tax compliance, helping develop your financial infrastructure, or working with you on strategic planning, an outsourced CFO can provide the necessary expertise to help you get a handle on the essentials and set you up for success.
Anjum Tunuli is Early Growth Financial Services’ (EGFS) Chief Tax Officer. An accomplished tax executive, with over fifteen years of experience, he works with successful small to mid-sized companies and their owners. www.earlygrowthfinancialservices.com
See inside October 2018
6 Types of Services Subject to Sales Tax
Historically, most states exempted services from sales tax – for a good reason: When states first began to levy these taxes around 1930, people spent more of their money on tangible goods. However, according to the Bureau of Economic Analysis, those ...