9 July 2018
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:
- 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.
- 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!
If you gain value from the 100 articles Jamey publishes on his blog each year, please consider championing this content!