South Dakota v Wayfair: Economic Nexus, Sales Tax & Ecommerce

South Dakota v Wayfair: Economic Nexus, Sales Tax & Ecommerce
This article is provided for information purposes only and does not constitute legal advice 

Yesterday morning, June 21st, the U.S. Supreme Court ruled that states are within their constitutional rights to collect sales taxes on purchases made from out-of-state online retailers.

The decision in South Dakota v. Wayfair overturned a 1992 ruling, known as Quill, that prohibited states from imposing sales taxes on companies that did not have a physical presence within the state.

The question facing ecommerce merchants is …

What Does South Dakota v Wayfair Mean for My Business?

In broad terms, the decision means that online businesses could now be liable for sales tax on orders made in states and counties where the business does not have a physical presence.

The “economic nexus criteria” used by states to determine whether a retailer is liable for sales taxes vary by state, but all aim to level the playing field between non-collecting out-of-state sellers and the brick-and-mortar businesses located within a state.

For instance, to trigger economic nexus in South Dakota, a remote seller (online and offline) must have $100,000 in taxable sales or 200 separate taxable sales transactions delivered into South Dakota during the current or previous calendar year. Ohio’s economic nexus law, in contrast, applies to merchants selling over $500,000 of taxable receipts into Ohio.

As such, it’s important to look at the law’s exact requirements and your business transactions state by state.

Economic nexus states map

For online businesses selling across state lines, the burden of managing sales tax can be onerous, time-consuming, and expensive.

Each state has its own rules for sales tax. In some states, counties and cities also have this power — meaning that businesses will need to understand and continually update as laws change across 12,000+ jurisdictions in the U.S. alone.

What Is Next for State Sales Tax and Online Businesses?

Moving forward, Congress may enact one or more pieces of legislation:

  • Marketplace Fairness Act (MFA)
  • Online Sales Simplification Act (OSSA)
  • Remote Transactions Parity Act (RTPA)
  • No Regulation Without Representation Act

Alternatively, if Congress does not enact legislation further regulating interstate commerce, it is possible that other states — in addition to those pictured above — will quickly adopt their own nexus rules, as this will go unchallenged by the courts.

In other words, economic nexus could soon be the new norm.

On Shopify, merchants still have access to the same tools they have always had, although they likely will need some support in fitting this new reality into Shopify’s current tax settings.

For Shopify Plus customers, we will continue to include Avalara AvaTax on all new accounts — as well as existing eligible subscriptions — which provides up-to-the-minute calculation accuracy, geolocation to pinpoint districts and rates, and automated filing across over 12,000+ jurisdictions.

As a cloud-based solution, Avalara automatically updates as new laws and regulations take effect, including those affected by South Dakota v Wayfair.

If you haven’t setup Avalara yet, you can find the option to turn it on within your Shopify admin under Settings > Taxes

Shopify admin: settings to taxes

For instructions, visit Avalara’s page within the Shopify Help Center

Is this ruling retroactive?

Based on the Supreme Court’s syllabus for South Dakota v Wayfair, no. However, if or when states enact their own legislation on out-of-state sellers, the answer to this question may vary.

What if my business charges the wrong taxes?

Charging the wrong taxes could make your business liable for those miscalculations as well as various fines and penalties for noncompliance.

I have a physical location with POS, does anything change for me?

The physical location of your POS should remain the same unless you take orders through POS that require shipping out of state. Shopify already adds shipping and taxes to POS orders to automatically reflect the calculations you’ve set in Shopify.

What about pop-up shops or traveling markets?

While there may be exceptions, pop-up shops or temporary locations are generally considered to be a physical presence, which means many states already expected that you register and collect sales taxes. This ruling only affects physical sales if those orders are shipped out of state.

Does this affect international businesses?

Only if you’re registered to collect sales tax in the U.S.

Shopify and South Dakota v Wayfair

South Dakota V Wayfair: Economic Nexus Sales Tax & Ecommerce

“The motivation behind online shopping isn’t to avoid paying local taxes so we don’t see it having a massive impact on ecommerce and its growth,” said Craig Miller, Chief Product Officer at Shopify, in a statement yesterday.

“That said, we think this change has the potential to make selling online more difficult for small businesses. Charging, collecting and remitting sales tax is a massive administrative burden and running a business is hard enough.

“Tax laws and regulations are complex and can change often, with Shopify’s platform, businesses can automatically handle most common sales tax calculations. You can also set up tax overrides to address unique tax laws and situations. We want to reduce this complexity for small businesses and we will help them adapt to this new reality.”

For More on Economic Nexus, Sales Tax & Ecommerce

About the Author

Aaron Orendorff is the Editor in Chief of Shopify Plus as well as a regular contributor to sites like Mashable, Lifehacker, Entrepreneur, Business Insider, Fast Company, The Huffington Post and more. You can connect with him on Twitter or LinkedIn.