The Future of Online Sales Tax Is Coming Soon to a State Near (or Far) from You

9 July 2018 | 28 Comments

Recently you may have heard about a Supreme Court ruling regarding online sales tax. I consulted my accountant (Anders CPA) and our contract lawyer (Zachary Strebeck) about it, and while there isn’t a conclusive answer yet due to each state having different laws, I have some information you might want to consider.

Let’s start with Zachary explaining exactly what the court ruling was:

South Dakota v. Wayfair, Inc., decided on June 21, 2018, is the Supreme Court’s attempt to catch up with the Internet’s effects on retail. Until now, Supreme Court precedent (1992’s Quill Corp. v. North Dakota) required some sort of physical presence in order for a state to tax a retailer. For online retailers, this meant that unless there was actually a physical location in a state, they didn’t have to charge sales tax.

This obviously puts local retailers at a disadvantage.

In the older case, the Court noted that Congress could use its power under the Commerce Clause of the Constitution to overrule this, but no bills have been successful in doing so.

Now, in 2018, the Court was faced with a South Dakota law requiring that any business making sales within the state of over $100,000 a year or engage in 200 separate transactions within the state to pay sales tax to that state.

They made this determination based on 2 main reasons:

  1. The Court found that the reasoning in the Quill case was flawed – a physical presence is not necessary to create the required connection in order to charge state tax. That there must be “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” is the precedent language at issue that the Quill court found required a physical presence, and the Court in Wayfair rejected.
  2. The physical presence requirement is an “artificial” distinction given modern e-commerce, and also an “extraordinary imposition” of judicial power over a state’s right to tax.

Is this just for South Dakota?

This is Jamey again, answering based on a phone conversation with my accountant. Basically, South Dakota has its own economic nexus rules (sales of over $100,000 to customers in that state or over 200 separate transactions in that state), and some other states have similar rules. But others either don’t have such rules or they have completely different rules.

However, my accountant suspects that a standard will soon emerge for all states. There’s really no reason a state wouldn’t want the boost in sales tax. It may be a few months or longer until we know more, though.

UPDATE: My accountant, Justin at Anders CPA, sent me this PDF that breaks down the rules by state.

How does this impact my revenue?

I think this hurts Kickstarter creators the most, as there’s currently no way to add sales tax to a reward. That means creators will either need to universally charge more for a reward or lose a few dollars in sales tax per reward. You can see on the KS “community” tab (like this one for the beautiful Planecrafters) if the project is close to reaching the economic nexus thresholds (though keep in mind you’ll need to consider sales for the entire year, not just on one project).

If you sell products on your webstore, as long as you turn on state taxes, consumers will pay a little extra, but they’ll clearly see it on their invoice as sales tax. Currently you probably only have sales tax activated for your current state, but when the dust settles in the coming months, you may need to activate it for all states.

There is a bit of a middle ground emphasized by my accountant, though. If all states adopt the South Dakota economic nexus rules, you really only need to charge sales tax on your webstore for states from which over 200 customers order each year. But how do you know which states those will be?

This is purely circumstantial, but I took a look at purchases per state from the Stonemaier webstore over the last 6 months. Here are the states with the most transactions:

  • California: 359
  • Texas: 210
  • Washington: 176 (currently has nexus)
  • Illinois: 160 (currently has nexus)
  • Pennsylvania: 108 (currently has nexus)
  • New York: 107

How does this impact my accounting?

If you don’t have an accountant, the time has probably come to get one. Hopefully the states will develop some kind of common, streamlined system to file sales tax, but for a while you may have to know the economic nexus rules for dozens of states as you pay sales tax to each of them. I’ve worked with Justin Marty at Anders CPA since the start of Stonemaier, and he knows his stuff (for Kickstarter creators and otherwise).

Okay, that’s enough from Jamey. Zachary, do you have any final thoughts?

The problem I have with the decision is that it doesn’t lay out a “bright line” rule for what is and is not acceptable for taxing small businesses. The $100,000/200 transactions minimum is specific to the South Dakota law, but the court isn’t specific about a minimum. So other states, who will almost certainly be enacting similar laws immediately, can either follow that minimum (most likely) or push the envelope by going lower or not allowing an exemption for small businesses at all. There’s nothing in the court’s opinion that specifically says that an exemption is necessary.

All the Court says is that “other aspects of the Court’s Commerce Clause doctrine can protect against any undue burden on interstate commerce, taking into consideration the small businesses, startups, or others who engage in commerce across state lines.”

This means that the Court is kicking the can down the road for a further challenge from small businesses, who are not as uniquely positioned to fight such a case as larger e-commerce retailers like Wayfair and Amazon. This decreases the likelihood that any laws imposing a greater burden on small online retailers (like game publishers) get challenged in court.

So, for now, those who are under the $100,000/200 transaction minimum can sleep soundly. But everyone should keep an eye on states as they pass more laws to collect taxes from online sales.

***

Do you have any thoughts or insight about this ruling? I’d love to hear your perspective in the comments!

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28 Comments on “The Future of Online Sales Tax Is Coming Soon to a State Near (or Far) from You

  1. What sort of impact do you think this will have on your production levels? Do you expect to increase /decrease the number of units produced to balance it out for example? What about fulfillment? Your games are shipped from Panda to fulfillment houses/distributors right? So who is taking the financial hit here? You as publisher or do they take it as you have effectively sold your stock to them in advance (they buy from you then sell to retailers right?) What about your games sold through 3rd party online retailers like Amazon or Cool Stuff?

    1. It won’t impact our production at all, as sales tax is originally paid by the consumer (then I essentially just relay those funds to the respective states). We don’t sell to or through Amazon or Cool Stuff; rather, we sell to distributors who sell to retailers like them. For sales to distributors, we’re not charged sales tax.

      When we make games at Panda, many of them are shipped to a warehouse in St. Louis (and most of those games are sold and shipped to distributors). Here’s more: https://stonemaiergames.com/board-game-supply-chain-basics/

  2. I’m originally from South Dakota. Darrah and I live in Kansas now, but I still consider myself a South Dakotan, and she has a lot of family there. There was a weird time where we would order stuff online and have it shipped to my mom in South Dakota instead of Kansas because no sales tax would be charged. It was a weird system that some states would charge it and some wouldn’t. I’m all for paying taxes, so I’m really glad South Dakota got its act together and fixed it. I’ve been following the Supreme Court case because of its ties to home, and when the ruling came down my thoughts immediately went to, “I bet Jamey is going to have a really good discussion about this and how it affects Stonemaier.” Well done! I hope it gets straightened out soon and doesn’t cause you too much trouble.

  3. Thanks Jamey for posting on this topic. State taxes just became much more murky, and while the laws will likely become clearer and more standardized over time, the immediate impact is that all publishers will likely be burdened with added operational complexity. And unfortunately, small and mid-sized publishers who use Kickstarter will likely bear the biggest burden because they lack the resources, tools, and processes to easily comply with disparate state laws. Employing or consulting an accountant is a good recommendation for those who can afford it or would like to save time.

    For those looking to bootstrap it (like we are), I think assessing your by-state transactional history (like you did) is a solid place to start. I’ll be looking into our biggest states and reading up on their existing online sales tax laws to assess where we might need to start filing. If you or anyone finds any useful links related to this, I’d greatly appreciate it if you could share them.

    In the meantime, I’m curious what Kickstarter backers may say about potentially paying sales tax with each pledge and how creators will manage this. Operationally, it seems quite likely that project creators will want/have to collect extra fees for this during or after the campaign, and I can see this easily becoming one of the biggest value adds for Pledge Managers. PMs already maintain complicated pricing tables for shipping by state, weight, country, etc, so adding tax tables seems like a natural fit. So while the operational aspects seem like they will be manageable, the question to me is more behavioral/psychological. If you are a project creator or a Kickstarter backer, how would you prefer to collect/pay sales tax on Kickstarter projects? Would you collect/pay it on a project, even if the publisher doesn’t end up surpassing the tax threshold?

  4. As someone from my outside the US, how would this effect us?

    If like you said ‘hat means creators will either need to universally charge more for a reward or lose a few dollars in sales tax per reward‘.

    Kickstarters pick the first option, I would be paid tax that I don’t have to pay? Likewise how about when a Canadian, Uk or any when where else sells into one for these states?

    1. I’m not sure about non-US companies. My guess is that because this new ruling changes the nexus from where you are located to where your customers are located, you would need to pay sales tax.

      1. What about Non-US backers, backing a US company/Kickstarter? If they increase the cost to cover the Tax, would they have two backing options for each option? One for US backers and one for Non-US?

        1. This only applies to backers who live in a US state. And the backer really doesn’t need to do anything different, as it’s the creators responsibility to pay sales tax to the states.

  5. Seems like the U.S. in coming in line with the EU, which has an organized system of sales tax (VAT) for it’s member states. The EU call countries “states”. We’re a union of states and you are united states.

    Great article. I think you are missing something in the following paragraph. It feels like an incomplete sentence:
    “Now, in 2018, the Court was faced with a South Dakota law requiring that any business making sales within the state of over $100,000 a year or engage in 200 separate transactions within the state.”

    That paragraph doesn’t include what is required of businesses meeting that clause, although the rest of the article explains it. Maybe it needs to be something like “[…] a South Dakota law requiring, any business making sales within [….], to pay sales tax.”

    In the EU business to business transactions have sales tax. It’s not just for consumers. But if a business buys a lot of things that have sales tax then it balances it’s self out because the sales tax you pay and receive can cancel each other out. However, if you DON’T buy much stuff that has sales tax, and just sell things with sales tax then you can’t claim it back.

    If your distributor was currently located in your state, would you have to charge them sales tax?
    If yes, then with the new laws you would have to charge your out-of-state distributor sales tax as well, if you were selling them more than €100k worth of games.

      1. That’s great.

        Here any business that makes money (over €70k) must pay sales tax. A business can’t make €5 million profit and say I didn’t sell it direct to a consumer so I don’t a have to pay sales tax on my sales. The U.S. government must be losing so much money, as there are a lot of giant businesses that only sell to other businesses.

        If that is that case, then that is amazing. Are you sure? If it is, then a multi-million dollar hotel cleaning company never has to pay sales tax because they sell their services to hotels/businesses instead of “customers”.

        1. My understanding about wholesale is that the transaction between creator (wholesaler) and distributor, and maybe between distributor and retail location aren’t subject to sales tax, otherwise you are applying that tax three times on each transaction in the supply chain. The companies still have to pay corporate taxes on their revenue/profit.

          1. If only what made sense was true. That is how sales tax (VAT) works in the EU. If an item is passed round 10 times through sales then 10 sales tax is applied, then 9 claim back for the bit they actually paid. The last company/person is stuck with the full sales tax bill. Don’t you just love how simple and elegant bureaucratic rules are? Sarcasm. Strange but true.

          2. Imagine having to pay all 3 like in the EU. Anyway, this is another good reason for Stonemaier Games not to use Kickstarter. You don’t have to pay sales tax when using a distributor.

            But having said that, maybe the percentages a retailer and distributor use are that way because of sales tax. The retailer store would pay sales tax on all the games they sell and that would influence what they pay from the distributor, which would influence what the distributor requires from the game publisher.

            So even though you don’t directly pay sales tax, I’m sure it does impact you. If retailers didn’t have to pay sales tax, then either the price of games would be lower or everyone in the chain would have higher profits than they do now.

      2. You are correct. I worked at an online distributing company that frequently interacted with resellers and tax exempt entities like schools and federal government.

        1. For the EU, whilst it creates a bit more admin (Company A charges VAT to B who claim that and then charge it to C etc) it is only the ultimate none vat registered user of the goods, probably a private individual, who will suffer the effects of the VAT and that is the intent of VAT law, it is a consumer based tax. Whilst some businesses might not be big enough to be registered for VAT and so claim it back, they have the benefit of not having to charge VAT on their sales either so there is some equality (but only some). The US system sounds like it probably works similarly to inter-EU cross border sales between two VAT registered businesses who having given each other their VAT Registration numbers effectively cancel the VAT on the transaction by the seller both declaring the VAT for payment and reclaiming the same amount as if it was a cost to them as it would be to the buyer and so paying nothing over to the tax people but at least quantifying the value of trade that has occurred.

          My understanding from the article of US sales tax is that it is also a consumer tax but they removed most of the admin that we in the EU are over burdened with and seem only to charge it to non-business customers, the rational presumably being everyone else down the chain will be paying corporate taxes on the profit they make on the business to business sales they make anyway and it is the consumer of the goods they are wanting to tax.

  6. I think you’re being optimistic. I feel that all states will start requiring sales tax to be collected on any transactions in their state by any online business. There’s little reason not to collect all the revenue they can.

    Most states will probably have some form of online portal, though.

    What I would worry about is if municipalities start getting in on the act.

    1. I’m not so sure. The Supreme Court has given their blessing to 200 transactions/$100k. Some states may push it, sure, but most of the time it’s not worth having to potentially have another legal challenge.
      I’ll give you an example: When you have a non-compete in an employment agreement, the generally accepted limit is that non-compete lasting over 2 years is “unreasonable,” because a court at some point ruled that. They didn’t give a “bright line” test for what is and is not unreasonable below that, just that we know that over 2 years isn’t acceptable (and that less than 6 months is almost always acceptable, except in places like California where they’re almost never acceptable).
      If I’m drafting a non-compete, I’m not going to push the limit – I’ll keep it under 2 years, because that’s safe and most likely less subject to challenge. Does that make sense? I foresee a similar situation with the state laws, unless some state gets a little wild and wants to push their luck.

  7. Jamey,

    I’m curious if this had been discussed, as it relates to KS creators and Backers…couldn’t one simply have the value of the item and the tax simply reflected at the reward Level. Thus, an $87 Scythe would pay for both the game and the associated tax? I realize that this, to some degree, upends your notion of Reward Levels ending in “9” along with the psychology around it, but it might be one way to incorporate the tax behind the scenes.

    Cheers,
    Joe

      1. Curious about how this would work in practice – maybe Kickstarter needs to implement a system for collecting sales tax where appropriate? Seems like an annoying burden to put on the creators.
        Then again, what if it’s never delivered, or any number of other complications happen – the backer could be paying extra for nothing. It’s a complicated situation!

  8. Thanks for the interesting read. Does this mean it will only apply to US based Kickstarters? So many KS are international. Still, things to consider for future releases.

  9. The paragraph below from the article seems like it’s missing something – I.e. requiring what ? That business to collect sales tax?

    Now, in 2018, the Court was faced with a South Dakota law requiring that any business making sales within the state of over $100,000 a year or engage in 200 separate transactions within the state.

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