A recent the United States Supreme Court decision requires certain internet retailers to collect sales taxes if certain requirements are met, even in states where they do not have physical locations. This decision goes against the prior application of this sales tax issue, which stated that state sales tax was only to be collected by a company if they had a physical presence in that particular state. This decision states that no physical presence in a state is needed to require that company to collect state sales taxes.
This Supreme Court decision assists companies with physical buildings in states who have long complained that there is an unfair business advantage for internet companies who are not required to collect sales taxes. This Supreme Court decision will try to equal the playing field for both internet companies and companies with physical brick and mortar buildings in a state by requiring both to collect sales taxes.
In looking at the decision in detail, in order for a business to be required to collect sales taxes, there must be some sort of nexus in a state. As discussed previously, having a physical presence in the state used to be the deciding factor of whether the nexus was sufficient to require the collection of sales tax. However, now after this decision, if you sell more than $100,000 worth of goods or services in a state in a year, or have 200 or more transactions in a state in a year, then that state can require you to register with the state, and you are liable for that state’s sales taxes on the sales you make in that state. Please note that this decision does not automatically go into effect. Each state must have a law requiring the collection of sales tax for these types of businesses. Some states will rely on general language in statutes that authorize sales taxes to be collected to the extent permitted by U.S. law to collect sales tax from these internet companies.
As a result of this ruling, business owners should plan accordingly to determine whether or not they need to collect sales taxes. Some of those considerations are as follows:
- The business should develop a plan to determine exactly what states the business needs to register in, and the implications of doing so in each state from a practical and sales tax perspective.
- Is the business’s product or service taxable in that state?
- If the business’s product or service is taxable, does the business have the proper computer software in place to break out product/service costs and sales tax costs?
- If the business is selling to an organization that is exempt from tax, then the business should make sure that they have all of the documents required to prove that that end-user is tax-exempt.
As a result of this recent Supreme Court ruling, both businesses and individuals who purchase products over the internet will have some new issues to consider. As a consumer, please be aware of these sales tax items on your purchases. For businesses, please make sure to contact your CPA and attorney to make sure that you have a plan in place to comply with this new ruling.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.