Photo attribution: David Dugan/Wikimedia Commons.
Due to a 2018 U.S. Supreme Court case (Wayfair v S. Dakota), internet retailers can now be required to collect sales tax. The tough part is interpreting what this all means; how states will apply the right to tax internet retailers (e-tailers).
1. Some important things for businesses. Registration. Before a business can collect sales tax they must officially register to seek permission to collect sales tax within the state(s) they conduct business within. If a business merely collects taxes prior to registration there is usually large penalties. NY State-as an example-can impose a $10,000 fine.
2. Acquire proper software if you sell via internet that will track sales in multiple locations. You must, however, research to be sure the product/service you are selling via the internet is subject to tax in various jurisdictions. Charging tax when not required could create problems with your customers and certainly put you at an economic disadvantage. So, do not presume all states treat all products/services the same regarding sales tax applicability.
3. Of course, do not jump into registering in all 50 states to collect sales tax, just because you are an e-tailer. The South Dakota law reviewed by the U.S. Supreme Court had a de minimis exemption in the law; under $100,000 in annual sales and less than 200 transactions in the state. Simply stated; if you did not meet those limits you are not required under the South Dakota law. to collect any sales tax. This does not mean other states must follow suit and exclude the same amounts but likely a drastic change of these exemptions would cause a state law to be unconstitutional because of the “burden on interstate commerce”, which the Courts are always concerned about.
4. An income tax requirement is now born in all these states. In addition to registering for sales tax in required states an internet e-tailer would need to register with that same state’s Department of State. This is required so the business has the legal authority to conduct business in that state. Consequently, if you are doing business in any state you are also required to file an income tax return, whether you are structured as a Corporation or Limited Liability Company. This of course truly increases the burden on internet companies not only in tax payments but in administrative costs for filing multiple income and sales tax returns.
5. So take a deep breath and conquer each item methodically. And hope that maybe Congress will intercede. Congress may be able to legislate this away and possibly create a uniform sales tax rate for e-trailers throughout the country and disburse the collections based on a formula of population or on the volume of sales from within each state. This would, however, not eliminate the need to file income tax returns in multiple states, but could eliminate the sales tax registration in the particular states.