Updated: Nov 5, 2020
By Nicole Cook
This article is not a substitute for legal advice. See here for the site’s reposting policy.
Last June, in a historic decision, the U.S. Supreme Court ruled that a state can compel “remote sellers,” (out-of-state internet, mail-order, phone-order, etc. sellers) to collect and remit sales tax to the state. Since then, nearly every state with a sales or use tax has instituted an “economic presence” or “economic nexus” tax requiring remote sellers to collect and remit sales tax for goods or services that they sell to purchasers in those states. If you’re selling products online to customers outside of your state, or you plan to, understanding these changes will help protect you from future tax liability and penalties.
The case, South Dakota v. Wayfair, Inc., changed the rules for retailers selling products online to out-of-state customers. Under prior law, a state could only require a seller to collect and remit sales tax to that state if the seller had some physical presence in the state like an office or a warehouse, or if they had an employee based in the state or company vehicles made deliveries into the state. Buyers who purchased goods or services from out-of-state retailers were supposed to file and remit taxes in their state on the purchases they made. Of course, few buyers complied, and states’ tax revenues declined as more people shopped online and purchased from out-of-state sellers.
After Wayfair, most states, the District of Columbia, and several U.S. territories have established, or are in the process of establishing, a threshold of either a minimum amount of total sales and/or a minimum number of transactions with customers in the state. For example, many have adopted South Dakota’s approach, which requires out-of-state sellers to collect and remit taxes to South Dakota on the sales of goods or services if they received more than $100,000 in gross annual sales or have more than 200 individual transactions from residents within South Dakota.
What Does This Mean For Farms That Sell Direct To Out-Of-State Customers?
The Wayfair decision poses a challenge for small businesses in particular who are selling goods or services directly to out-of-state customers through online, mail-order or phone sales, which more and more farms are doing. Out-of-state sellers that deliver goods into a so-called “economic presence” state will need to analyze which states have adopted or plan to adopt economic nexus threshold requirements, and then determine for each state whether their sales in each state exceeds the state’s threshold, to ensure they’re in compliance with all jurisdictions (state and local) in which they have customers. (See Avalara’s site for a list of current remote seller nexus thresholds for each state.) Remote sellers will also need to assess the possible effects on their business, including additional cost for technology updates like compliance software solutions to help them assess, collect and remit the correct amount of tax in states in which they are selling.
Another consideration is displaying and/or selling at swap meets. Some states have tradeshow exemptions, but in other cases, by displaying product in that state, you have created a physical nexus even if you do not meet the sales or transaction minimum thresholds. Drop shipments may also create nexus. Even if you sell to a business with a re-sell certificate, if you drop ship that order for them into another state, you may be creating nexus unless they are able to provide you with a sales and use tax certificate for each state in which they have customers.
In addition to enacting laws for direct sellers, several jurisdictions have passed or are in the process of passing laws or regulations requiring marketplace facilitators like Etsy, eBay or Amazon to collect sales taxes on behalf of their sellers. Small businesses that sell products on those platforms could see their profits drop. As a result, retailers will need to review their profit and loss numbers closely and may need to make some tough decisions.
Also, only selling business-to-business does not necessarily shield you from collecting sales tax. Most states require that you possess their re-sell certificates in order to not charge for sales tax. These exemption certificates need to be updated periodically depending on each state’s policies.
What About Wineries, Breweries or Distilleries?
In many states, the collection and remittance of sales tax is a condition to receive a license to ship alcohol directly to customers in that state. That means that businesses who are fully compliant with licensing rules in those states are already remitting sales tax in those states and the Wayfair decision probably has limited impact on their online sales tax compliance. Shipping to other states, however, that had been following the historical “physical nexus” rule for remittances, or shipping non-alcoholic items like merchandise or clothing into states that may not allow shipments of alcohol direct to customers, may now require sellers to collect and remit sales tax on non-alcoholic products. If your business has not been keeping current on licensing and sales tax compliance, contact an attorney or accountant for more information. You can find a list of attorneys in the Delmarva region at ALEI’s website under the Legal Resources tab.
Monitoring sales and addressing the different state tax policies and procedures can be difficult and expensive. However, businesses that ignore these new obligations do so at their own peril. If you’re selling remotely to customers in other states, and you aren’t already calculating, collecting and remitting sales or use taxes to those states, consult a tax specialist. Given the complexity of state tax laws and the differences among states, businesses of all sizes doing online sales need to carefully monitor both the legal landscape and their processes established for administration and compliance for out-of-state transactions.