Last year the Wayfair decision of the US Supreme Court turned many years of established law on its head when the court approved a South Dakota law that requires out-of-state sellers to collect and remit sales tax on their sales of tangible personal property into the state. This law applies to any remote seller, which includes online retailers and “old-school” catalogue sales companies. However, the Court did not grant a free hand to the states to impose this requirement on any and all sales by remote sellers of tangible personal property into their respective states. The court based its decision on specific aspects of the South Dakota law, including the fact that the law only applies to sellers whose sales into South Dakota exceed $100,000 or 200 or more separate transactions per year.
Now that it has been more than a year since Wayfair, how have the states responded to this game-changing decision? Given the variety of responses, it is difficult to generalize, but here is how five of the larger states with sales tax have responded:
California enacted a law effective April 1, 2019 that requires remote sellers to collect and remit sales tax if sales in the preceding or current calendar year exceed $500,000. There is no state-wide rate; if a seller has sales above the threshold amount, the seller must collect and remit both state and local sales tax, with the local portion varying by county and city.
A bill was introduced in the latest legislative session in Florida that would have imposed collection requirements on some out-of-state sellers. However, that bill did not make it out of committee, so Florida continues not to impose collection requirements on out-of-state sellers.
Effective January 1, 2019, out-of-state retailers with sales into Georgia of at least $250,000 in sales or 200 individual sales transactions in Georgia must collect Georgia state and local sales tax. Effective January 1, 2020, the threshold will be lower, with the requirement falling on out-of-state retailers with sales into Georgie of at least $100,000 or 200 individual sales transactions.
New York has often taken the lead in attempting to force out-of-state sellers to collect sales tax on their sales into New York. New York was an early adopter (2008) of what is known as an “economic nexus” law, or more commonly “Amazon law,” which expanded the definition of “nexus” to include independent in-state websites or affiliates used by out-of-state retailers to promote sales. More recently, New York has taken two further steps in light of Wayfair. First, following Wayfairand the South Dakota law, New York announced early this year that out-of-state sellers are responsible for collecting and remitting sales tax for online transactions if the business has made more than $300,000 in sales of tangible personal property and 100 sales of tangible personal property delivered in the state in the past four sales tax quarters. Second, and most aggressively, New York has enacted a “marketplace provider law” – also known as an “Amazon 2.0 law.” This new law, which became effective June 1, 2019, requires third-party retail sites like Amazon, eBay, and Etsy to collect and remit sales taxes when a buyer in New York purchases something from a retailer on their site.
Texas amended its law to require out-of-state sellers to collect and remit sales tax with a threshold of annual sales of $500,000. However, rather than a pure calendar-year base, the Texas rules impose the new requirement if sales in the preceding twelve months exceed $500,000. As part of the transition to the new requirement, the first test period was sales from July 1, 2018 through June 30, 2019. Sellers meeting this threshold are required to begin to collect and remit sales tax for sales on or after October 1, 2019; this delay is to allow time for sellers newly subject to these requirement to set up the necessary procedures to collect and remit the taxes. There is an optional single state-wide rate for sales into the state, an aspect that makes the compliance requirement in Texas somewhat less burdensome than in other states with variable rates by county, city, etc.
SSUTA (“What’s That?”) and Are These Laws Valid?
One of the factors that the Supreme Court relied on in upholding the South Dakota law is that South Dakota is a member of the Simplified Sales and Use Tax Agreement (SSUTA), under which participating states keep substantial autonomy as to which items or services are taxed and at what rates, but agree to uniform definitions and other simplifying aspects, such as uniform definitions and streamlined procedures. At present, twenty-four states are full members or associate members of SSUTA.
Of the four states mentioned above with new sales tax collections requirements (California, Georgia, New York and Texas), only Georgia is a member of SSUTA. Given that Georgia’s law and status most closely parallels the law of South Dakota that was blessed in Wayfair, there is little doubt about the validity of the Georgia law. In addition, while Texas is not a member of SSUTA, it has adopted certain SSUTA provisions, as well as an optional state-wide rate, which helps lower the burden on out-of-state sellers, so there is also little doubt the Texas law is valid.
California and New York are not members of SSUTA and neither has adopted a single state-wide rate for out-of-state sellers, so there may be a valid argument that their requirements are overly burdensome on remote sellers and invalid. This is echoed by the web site of the Tax Foundation, which has a posting that includes the following:
The remaining states [non-SSUTA] have not completed several items on the Wayfair checklist, in large part due to their non-membership of SSUTA. Without action to adopt uniform definitions and simplify their sales tax systems, requiring collection from internet sellers will be under a cloud of legal uncertainty.
What’s a Seller to Do?
Given the rapidly evolving landscape and increasingly aggressive efforts by the states, companies need to analyze the amount of their sales into each state and then work with legal counsel to:
- obtain updated information on the laws of each state in which it has substantial sales, since many states are adopting new laws in light of Wayfair;
- analyze the laws of those states, noting that states vary in areas such how the licensing or sale of software is treated and whether services are taxed; and
- make a determination as to whether collection of sales tax on sales into those states is now required.