(Photo Source: TaxCredits.net)

Last week, the U.S. Supreme Court issued a landmark decision regarding online vendors and the collection of sales or use tax (South Dakota v. Wayfair, Inc. (“Wayfair”). In its previous decisions, the Court found that in accordance with the Commerce Clause vendors needed to be physically present in order for a state to demand that vendors collect sales tax. The responsibility of reporting the purchases then shifted to the in-state consumers to pay a use tax. Consumer reporting of the use tax is historically much lower than the sales tax to be collected by vendors. In response to low collections of the use tax, South Dakota passed a law deeming vendors to be treated as if they had a physical presence in the state if they sold more than $100,000 of goods or services annually within the state or engaged in 200 or more transactions for goods or services within the state. As a result, such out-of-state vendors would be required to collect sales tax on transactions and remit those funds to South Dakota.

In Wayfair, the Court reexamined its earlier analysis and ultimately decided to overturn its previous decisions from 1967 (National Bellas Hess, Inc. v. Dept. of Revenue of Illinois) and 1992 (Quill Corp. v. North Dakota). The key takeaway is that an out-of-state vendor’s physical presence in the state is no longer necessary, affording states the right to demand out-of-state vendors collect sales tax. Although many large online vendors (such as Amazon) already voluntarily collect sales tax for online transactions, this decision will substantially affect smaller business owners. However, the extent of the impact will depend on each state’s law. For example, under South Dakota’s law, a California-based business with an online store will have to collect sales tax on transactions with South Dakota residents if the business sells more than $100,000 in goods or services or has 200 or more transactions for goods or services within South Dakota. Other states may set different thresholds.

California currently requires out-of-state vendors to pay California sales or use tax on all sales of merchandise to California customers if the business is “engaged in business” in California.  Currently, “engaged in business” in California does not include online sales where the business’ only connection with California is to ship products via a common carrier, provided the business has no other physical connections to the state.  This position aligns with the now-overturned U.S. Supreme Court cases, and what California may do, given the new decision from the Court, remains to be seen.

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