In 2018 the U.S. Supreme Court, in South Dakota v. Wayfair, Inc., 138 S.Ct. 2080, held that states can require out-of-state retailers to collect sales taxes from in-state customers, even if the retailers have no physical presence in the states.
In Wayfair the Court upheld the constitutionality of South Dakota’s sales tax law, which requires sellers who don’t have a physical presence in the state to register for a sales tax license and collect and remit sales tax if the seller -
- on an annual basis, delivered more than $100,000 worth of goods and services into South Dakota; or
- engaged in 200 or more separate transactions for the delivery of goods and services into South Dakota.
Wayfair overturned previous U.S. Supreme Court decisions holding that the Commerce Clause of the U.S. Constitution required a physical nexus between a state and an out-of-state seller. Instead, the Wayfair Court held that an economic nexus was sufficient.
New requirements for online and remote retailers vary by state
After the Wayfair decision many people wondered what the impact would be on online businesses and other retailers without a physical location in a state. The answer depended upon what the states would do. Would the states with similar laws to South Dakota start enforcing them? Would states with sales tax laws requiring a physical presence change them to require an economic presence instead? The four months since Wayfair was decided have shown that the answer to both questions is yes.
By October 1, more than half of the states had sales tax laws requiring out-of-state sellers to collect and remit sales taxes if they had an economic presence in the state. What constitutes that economic presence differs by state. Some states have adopted South Dakota’s threshold of $100,000 in sales or 200 transactions.
However other states have a higher threshold or require additional in-state activities to trigger the obligation to collect sales taxes. The type of goods and services sold that are included in the threshold calculation can differ too.
Online and other out-of-state retailers also have to register and obtain a sales tax license from every state where they meet the economic threshold and are required to collect sales taxes. The registration procedure varies depending upon which state or states registration is sought. There are 24 states that adhere to the Streamlined Sales Tax Registration System. This system allows registration in all 24 states through a single application. Businesses that do not want to register with all 24 states at once, or that are registering with one of the other 26 states or D.C., register directly with the state tax department.
Sales tax laws vs. foreign qualification Laws
Some companies that operate exclusively online or otherwise without a physical location have questioned what impact Wayfair has on their decision whether to qualify to do business as a foreign company with the state corporate filing office.
It is important to remember that Wayfair’s holding deals with sales tax laws. It does not address provisions of the state corporation, LLC, or LP laws that require business entities organized in another state to obtain a certificate of authority and appoint and maintain a registered agent and office before doing business in the state.
Furthermore, the qualification “doing business” test is not the same as the taxation “doing business” test. Generally, it takes a greater level of in-state activity to require qualification.
For example, an LLC doing business solely online with over $100,000 in revenue from sales to South Dakota customers will have to register for a sales tax license and collect and remit sales taxes to the state. However it might, or might not, be considered doing business in South Dakota sufficient to trigger the qualification requirement.
Similarly, if the LLC had less than $100,000 in sales and fewer than 200 transactions, that does not necessarily mean it would not have to qualify in South Dakota. An analysis of all of the LLC’s activities in South Dakota, not just its level of sales, would be required to determine if it could be considered doing business for qualification purposes.
It is also helpful to keep in mind that the business entity laws do not contain economic thresholds like the sales tax laws. And if a state law did require qualification based on a specific amount of revenue or number of sales it would not necessarily be constitutional just because the sales tax laws are.
The main issue, when a court decides whether a state law that regulates non-residents violates the Commerce Clause, is whether it places an undue burden on interstate commerce. The burden placed by sales tax laws is different from the burden placed by the qualification provisions of business entity laws and the analysis of each is different.
What should online and out-of-state sellers do now?
Retailers that sell online or in states where they do not have a physical location need to obtain a sales tax license in each state where they meet the threshold requirement to collect and remit sales taxes from in-state sales. They will then have to begin charging and collecting the sales taxes and remit the taxes to the state. The sales tax rates and remitting due dates and procedures vary by state, adding to the complexity of compliance. What may be most important to remember is that whether a particular company is doing business, such that qualification is required, is a complex legal issue that should be referred to counsel.
Managing all of your company’s state sales tax registrations and other business license requirements can be difficult. One way to navigate the tricky business license compliance landscape is to partner with a business license compliance service provider such as CT.
You can contact your CT representative or call (855) 316-8948 for more information.