A recent ruling from the United States Supreme Court fell in favor of the state of South Dakota, potentially leading to significant impacts on remote online sellers and the customers (in all states) who do business with them.
About South Dakota v Wayfair, Inc.
Historically, ecommerce business which did not have "brick and mortar" facilities in a given state have been able to avoid charging sales tax for transactions delivered into that state.
A June 21, 2018 ruling in the case South Dakota v. Wayfair, Inc. has effectively repealed the 1992 ruling and set a new precedence. By all accounts, all states (not just South Dakota) will now be able to require companies to collect sales tax even if they do not have a physical presence within the state if they meet certain requirements (known as economic nexus).
As for South Dakota, it can now enforce the so-called Remote Seller Compliance law (SB 106). This requires out-of-state remote sellers to collect and remit sales tax for the calendar year, provided that the sellers have:
- More than 200 taxable sales transactions delivered into South Dakota within the same year, or
- More than $100,000 in gross revenue within the same year
Arguments in support of this ruling can be summed up as follows: the 1992 ruling harmed states as well as brick and mortar retailers by taking away critical revenue and a level playing field, respectively.
Meanwhile, critics of the ruling cite it as in favor of large over small businesses, and one that incurs increased cost, risk, and overall negative impact on small to mid-size ecommerce businesses who may struggle to develop, grow, invest, innovate, and hire as a result.
But the court found that the previous precedent set by the 1992 ruling was "unsound and incorrect" and "creates rather than resolves market distortions," especially given the exponential changes to and ubiquitous nature of ecommerce over the past decade. Ultimately, the court voted in favor of the state.
The Short and Long-Term Implications of This New Ruling
For remote sellers and online distributors they must now familiarize themselves with each state’s rules, develop a process for monitoring their shipments into those states and potentially having to register and collect & remit sales taxes.
Manufacturers will be impacted, as well, since they may be required to register for a tax license in different states. Manufacturers must be especially careful with drop shipments. If the manufacturer is registered in additional states to charge sales tax, it must do so unless the re-seller provides a resale certificate applicable for that state.
As for customers who shop remotely—which, according to a 2016 Pew Research Center survey adds up to about 8 in 10 Americans—they may eventually find themselves having to pay extra money in the form of a sales tax for goods and services purchased online.
Your Actions as a Distributor
The changes laid out by South Dakota v. Wayfair, Inc. have since been signed into law and officially went into effect on November 1, 2018. Subsequent to the Supreme Court ruling in June, many other states quickly followed suit and have laws that are already effective.
As a distributor, a manufacturer or an ecommerce company, now is the time to speak to your appropriate tax professional for specific guidance. You may very well will need to consider registering in states outside of your own.
Got questions about purchasing and drop-shipping International Enviroguard apparel and products in light of this new tax ruling? Contact our team to learn more.
For information on the impact to your business, please consult with your accounting or tax professional.