Internet Sales Tax and Small Businesses

The recent Supreme Court ruling in South Dakota v. Wayfair has been heralded as a win for brick-and-mortar businesses. The bigger impact will be on how internet businesses must operate going forward. How will these changes impact your business?

Physical presence no longer reflects business environment

Last week's ruling allows states to require online retailers to collect sales tax, regardless of whether or not they have a physical presence in the state. Prior to this, states were only allowed to require the collection of sales tax if the company had a warehouse or store located in the state. This created a competitive disadvantage for the brick-and-mortar businesses competing against online sellers able to offer lower prices which excluded sales tax. The Court determined that the prevalence of technology has made it much easier for businesses to limit their physical presence while still meeting customer expectations.

What to expect as states begin to implement

While the Court did not spell out how states should implement the collection process, the Court did set limitations to prevent abuse by the states. States cannot discriminate against out-of-state businesses and any sales tax collection method should not place an "undue burden" on interstate commerce. Other suggestions outlined by the Court followed South Dakota's approach in the case itself. Under South Dakota sales tax laws, companies with less than $100,000, or fewer than 200 separate sales, to South Dakota residents per year were exempt. Additionally, South Dakota did not seek to collect taxes on sales prior to the law being enacted. The other item the Court suggested was that states should aim to limit administrative and compliance costs.

States are likely to decide on their own

It is possible that Congress will provide the baseline rules for all states to follow, however that is not expected to occur at the moment. Without action by Congress, each state will be on their own to determine if and how they want to collect sales tax on internet only sales. South Dakota expects to begin collecting in 30-90 days. Other states, including North Dakota, have already passed similar laws to South Dakota's law in anticipation of this ruling.

At Malloy, Montague, Karnowski, Radosevich & Co., P.A. (MMKR), we are constantly on the outlook for multi-state compliance and tax planning opportunities. If you are concerned about how your business will be impacted by the new ruling, call our team today to schedule a sales tax consultation with one of our accountants.