Four years ago, the Supreme Court’s decision in South Dakota vs. Wayfair changed everything about sales tax compliance for businesses with revenue from multiple states.
Instead of being responsible only for transactions in states where you have a store, your company must now collect and remit sales tax for all your transactions as soon as you reach a sales threshold in each state. Since it’s hard to predict when that will happen, it makes sense for most companies to register for and collect sales tax in all 50 states, plus any territories where they do business.
This can affect not just ecommerce businesses, but also manufacturers, direct sales companies, construction companies, and more. Any time you gain revenue from a state other than your own, you can be categorized as a remote seller, and responsible for sales tax compliance.
The Supreme Court decided that this would not be an undue burden, but Congress is not so sure. In fact, Congress had spent years debating this question before the states got involved. Now the Senate Finance Committee is looking at the issue again.
A Major Headache
Sen. Ron Wyden of Oregon described online sales tax as “a major source of headaches and costs for small businesses around the country today.” Oregon doesn’t have a sales tax, so Sen. Wyden’s constituents had to scramble to figure out how to handle sales tax. But Wyden pointed out that small to medium businesses in every state were having to deal with new challenges. “Sales taxes in America are extremely complicated. Forty-five states and hundreds of localities have different laws for sales taxes. Different tax rates. Different regulations for who collects taxes. Different rules and definitions for taxable products.”
James R. McTigue, Jr., Director for Tax Policy and Administration at the Government Accountability Office testified in the hearing and filed a report of the GAO’s initial observations.
The GAO pointed out that states began requiring sales tax compliance of remote sellers within three months of the Wayfair decision. Many companies had not yet gotten a handle on remote sales tax compliance at that point. That meant that many companies started out on the wrong foot.
New York State actually dated its law requiring remote sellers to collect sales tax from the day the Supreme Court made the Wayfair decision. Maine and Vermont jumped on the bandwagon two weeks later.
The GAO also pointed out that the thresholds for each state can vary. Not only does the amount to establish the threshold differ from one state to another, but the details can also be different. For example, Illinois requires sales tax registration and compliance when a seller has $100,000 in revenue. Indiana requires it only when the seller has over $100,000.
Some states count total revenue, including nontaxable sales. Others only apply taxable sales to the threshold. Some include only retail sales and others count gross sales toward the threshold. Some states have thresholds based on revenue, some on transactions, and some on both revenue and transactions. Those that count transactions have varying numbers of transactions.
Some states count the current calendar year and some count the previous calendar year. Some count the preceding 12-month period, or the 12 months preceding the last day of the previous quarter, just to make sure the whole thing is as confusing as possible.
There is no rhyme or reason to this muddle, and it makes it very easy to make honest mistakes.