In June of 2018, the Supreme Court made significant changes to laws regarding sales taxes. In a decision known as the Wayfair Ruling, states now have the authority to collect sales tax from a broader pool of businesses. This ruling will likely affect how you pay sales tax, but read the rest of the article to figure out your best course of action if you do experience new sales tax requirements!
Significance of the Wayfair Ruling
Last June was huge for the realm of sales tax. The ruling concerned the case, South Dakota v. Wayfair. This case involved the state of South Dakota and the company of Wayfair. South Dakota was seeking to collect sales tax from online transactions Wayfair had in the state.
At this time, the case was huge because more than half of the states in the U.S. have some form of laws regarding sales tax for online sales. Ultimately, the Supreme Court sided with South Dakota, indicating that sales tax should be charged on companies making significant revenue within a state.
South Dakota v. Wayfair set a standard of requiring the collection of sales tax if a business earned more than $100,000 in revenue or 200 transactions occurring directly in the state in question. Many states have since proposed some form of tax bill to adhere to these newly accepted standards.
When it comes to sales tax, there are two important terms to understand. The first of those is economic nexus. Economic nexus is evaluating a company’s impact despite not being physically located there. Often times, direct sales are the only real way to see how much a business operated within a specific state.
The other term is click-through nexus, which refers to an evaluation of a company’s impact through use of an affiliate to create a sale. A business connected to a state with click-through nexus would owe sales tax each time the affiliate made a sale.
Specific State Changes
Not every state in the U.S. has made significant changes to their sales tax laws. The states listed below, however, are definitely in the process, and here’s what you need to know:
California is currently in the process of making major changes to their sales tax law. Right now, if you don’t live in the state, but make more than $100,000 in sales (or 200 transactions) within the state, then you must collect sales tax for California.
A few changes are currently in the works. A new proposal would raise the threshold for the economic nexus to $500,000. It would also enact a requirement that facilitators of marketplaces be responsible for collecting sales tax.
Both of these changes would benefit sellers located in and outside of California, requiring less sellers to pay tax and having marketplaces collect sales tax in the event they do need to pay. This could mean that if you’re between $100K and $500K in sales within California, you might not need to collect sales taxes in the future.
Idaho currently has click-through nexus, but don’t expect that to stick around for much longer. Lawmakers within the state have been discussing a switch to an economic nexus format, which would copy California’s proposal of having marketplace facilitators collect sales tax as opposed to sellers.
Kansas doesn’t currently have a system regarding sales tax for outside entities. A tax bill was submitted that would’ve instituted a requirement for sellers outside the state to collect tax if they exceeded more than $100,000 in sales within Kansas. Unfortunately, the bill had other important language which which the governor didn’t agree. The bill was ultimately vetoed in the interest of protecting the state’s economy.
Unlike Kansas, Nebraska has approved and finalized a bill that requires businesses outside the state to pay sales taxes on transactions occurring within Nebraska. This requirement does come with a $100,000 sale floor (or 200 transactions).
If you experience significant sales within Nebraska, you may now be required to collect sales tax on transactions. This changes also carries the mandate for marketplace facilitators to collect sales tax, a popular provision for states considering sales tax law change.
Pennsylvania has had fairly clear sales tax requirements for outside businesses for more than a year now. This has mainly been collected by facilitators of marketplaces. The one thing exempt from tax was the sale of digital products, but those are now eligible for sales tax collection per a change finalized on April 1st.
There isn’t much change for Pennsylvania, but if you sell digital products in the state, you’ll now incur a sales tax fee for those transactions.
This month, Virginia has followed the lead of other states and has made economic nexus the standard. They also indicate that marketplace facilitators must collect the sales tax. The state uses the common $100,000 threshold for sales (or 200 transactions).
Because this is a new law, this affects anyone exceeding 200 transactions within the state of Virginia.
Washington, in particular, has made several renovations to the economic nexus system. There is no longer a threshold for transactions, and click-through nexus no longer exists. Instead, the state does have a $100,000 threshold, but it is a requirement for cumulative gross income rather than sales made in the state.
This is done to simplify the definition and understanding of the law. It is now a very clear cut $100K within Washington, no matter how many transactions occur.
Seek Counsel from a Knowledgeable Professional!
Taxes of any form can always be a headache, but sales taxes are a whole other story. Fortunately, the number of businesses directly impacted by new sales tax laws are quite minimal. Unless you exceed $100,000 in online sales directly in another state, you won’t be required to collect sales tax on those transactions.
If you want to ensure you’re complying with all sales tax requirements, the smartest thing you can do is talk to an experienced accounting professional. They stay up to date with all the latest accounting and tax changes, keeping them prepared to help and answer any questions you may have! Find expert advice today, and be fully prepared to handle your taxes tomorrow!