Online Sales Tax: Wayfair Ruling & California Online Firms
Ever since the Internet became a primary way for people to buy things online, there has been a battle between state taxing authorities and e-commerce businesses about collecting online sales tax on goods that are sold on the web. This summer, a ruling by the U.S. Supreme Court may have settled the conflict once and for all.
In the case of South Dakota v. Wayfair, Inc., the Court removed the physical presence requirement for sales tax nexus. As a result, states can now force e-commerce businesses to collect online sales tax on goods and services sold in the state even if the business doesn’t have a physical presence (or nexus) in the state. The ruling will affect businesses that sell goods and services online, as well as via mail or telephone order (or MOTO) businesses.
The Supreme Court’s ruling in the Wayfair case effectively overturns an earlier case from 1992 that had been considered precedent. In Quill Corp v. North Dakota, the Court ruled that states could only collect online sales tax from businesses that had one or more bricks-and-mortar locations in the state. However, e-commerce didn’t really exist yet at that time, so the ruling applied mainly to MOTO sales.
In its majority opinion in the Wayfair case, the Court acknowledged that “the Internet’s prevalence and power have changed the dynamics of the national economy.” For example, mail-order sales in the U.S. were just $180 billion in 1992 when the Court delivered its Quill ruling. In comparison, online e-commerce sales were more than $453 billion last year.
The Court also acknowledged that the explosion of e-commerce has significantly increased revenue shortfalls for states seeking to collect sales and use taxes. According to the Government Accountability Office (GAO), prohibitions against collecting sales tax on Internet sales cost states between $8 billion and $13 billion last year. Technically, consumers are supposed to pay the Internet sales tax that applies to online purchases when they file their state income tax return, but very few people do this.
Worth Noting About the Wayfair Decision
There are a couple of things worth pointing out in the wake of the Wayfair ruling. First, many states already collected an online sales tax of some kind before the ruling. And second, some state laws already have a nexus standard that allows them to tax to the maximum extent permitted under the U.S. constitution. These states can now immediately collect sales taxes on MOTO and online sales under the new nexus standards.
In California, online sellers must collect and remit sales and use tax if their affiliates sell at least $10,000 a year in goods through referrals to sales platforms like Amazon or through links or ads. They also must collect and remit sales and use tax if they sell at least $1 million per year in goods to customers who live in California, or if a member of their corporate group is in California.
In 2012, the California legislature passed a law defining a retailer engaged in business in the state as “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.”1 This law required Amazon to begin collecting and remitting Internet sales taxes in California.
De Minimus Rules for Collecting Online Sales Tax
In South Dakota, there is a de minimus rule that applies to the collection and remittance of sales tax on out-of-state online and MOTO sales. According to the rule, only businesses with more than $100,000 in sales or at least 200 transactions in a state must levy and remit sales taxes. It’s expected that most, if not all, states will adopt a similar de minimus rule.
In July, the California Department of Tax and Fee Administration (CDTFA) inadvertently posted rules on its website for the collection of sales and use tax on goods sold online. They quickly took the rules down, saying the posting was a mistake and they haven’t issued official guidance yet regarding collection and remittance of online sales tax. The document established the same de minimus thresholds — more than $100,000 in sales or at least 200 transactions in a state — as those in South Dakota. The document also stressed that the Wayfair decision doesn’t change California’s existing rules related to the collection of use tax by online retailers (as detailed above).
While acknowledging that it’s too early to know yet how much additional tax revenue the Wayfair decision might result in for California, the director of the CDTFA estimated that the state has been missing out on about $1.8 billion in revenue it could have been collecting from e-commerce businesses.
In the case of South Dakota v. Wayfair, Inc., the U.S. Supreme Court removed the physical presence requirement for Internet sales tax nexus. As a result, states can now force e-commerce businesses to collect sales tax on goods and services sold in the state even if the business doesn’t have a physical presence in the state. Many states, including California, are expected to adopt de minimus rules establishing sales and transaction volume thresholds for collecting sales taxes on online purchases. In a role as a project CFO or part-time CFO, a former enterprise CFO from an outsourced CFO services firm can help you devise an online sales tax strategy based on the Wayfair ruling.
1 Sales and Use Tax Law, Chapter 3 The Use Tax, Section 6203; California Department of Tax and Fee Administration; Revision 2018
Arthur F. Rothberg, Managing Director, CFO Edge, LLC