E-commerce can be a boon for retailers – large and small – looking to expand their sales footprint beyond their brick and mortar locations. However, following the United States Supreme Court’s June 21 ruling in South Dakota v. Wayfair, Inc., navigating e-commerce just became more complicated.
In Wayfair, the online retailer challenged a South Dakota law that required all retailers selling goods to South Dakotans to collect South Dakota sales tax on those transactions. Wayfair argued that because it had no physical presence in South Dakota, that South Dakota had no legal right to force Wayfair or any other out-of-state business to collect South Dakota sales tax.
Prior to the Court’s decision in Wayfair, a state could only require an online retailer to collect sales tax for that state if the retailer had a physical location within that state. This so-called “physical presence rule” had origins in prior Supreme Court decisions that held states could not collect sales tax on purchases their residents made through out-of-state mail order catalogs.
Based on this “physical presence rule,” retailers like Amazon or Target collected Wisconsin sales tax on online purchases made by Wisconsinites because Amazon and Target have physical distribution or retail operations in Wisconsin. Following the same rule, a store owner with a single location in Green Bay that sold goods online to Minnesotans would not collect Minnesota sales taxes because that store had no physical presence in Minnesota.
The Supreme Court’s recent decision in Wayfair expressly overruled the “physical presence rule” that prevented states from requiring out-of-state companies to collect sales taxes for purchases made by people in other states. Accordingly, Minnesota can now enact legislation to force out-of-state retailers to collect Minnesota sales tax on purchases made through those retailers’ websites by Minnesotans. The decision has several consequences for businesses selling goods online.
Businesses with online retail operations now need to keep themselves up-to-date with sales tax laws in every state and municipality across America. Depending on the state, sales tax can vary by county or city. In Wisconsin, 72 counties impose one of four unique sales tax rates that vary by county and range from 5% to 5.6%.
Tracking sales tax rates in other states can be much more complicated. In neighboring Minnesota, the state, counties, municipalities, school districts, transportation districts, and special purpose districts each have the power to impose their own sales taxes. While Wisconsin-based retailers with no presence in Minnesota could previously ignore these varying tax rates, those retailers selling products online could find themselves obligated to pay these and other sales tax rates to states and local government entities across the country.
Because sales tax rates can change, businesses must also keep themselves abreast of changes to sales tax laws in each taxing jurisdiction across the United States. Brown County provides a useful example of how sales tax laws can change. From 2000 to 2015, Brown County charged a .5% sales tax on top of the 5% charged by the state. From 2015 through the end of 2017, Brown County stopped charging this .5% sales tax. Effective January 1, 2018, Brown County resumed charging a .5% sales tax. While it is relatively easy for a business in Green Bay to follow these changes, the same is not true of online retailers in Florida or California. Just as out-of-state retailers must now follow Wisconsin sales tax laws, so too must Wisconsin retailers track changes in out-of-state sales tax laws.
Complicating these sales tax issues is the fact that state laws are not uniform in requiring the collection of sales taxes for purchases their citizens make through out-of-state retailers. Not all states that collect sales tax currently require out-of-state retailers to collect those sales taxes. Online retailers should thus check whether particular states collect taxes and keep themselves up-to-date as additional states begin to require out-of-state retailers to collect sales tax. Following the Supreme Court’s ruling in Wayfair, expect that number of states to increase.
Sales tax laws requiring out-of-state businesses to collect taxes also raise enforcement and jurisdiction problems. The Constitution imposes limits on the extent to which individuals and businesses can be subject to court proceedings in states other than the one in which they reside. Selling one product to a consumer in Washington through the internet may not be enough to subject a Wisconsin business to personal jurisdiction in a Washington court. Businesses should always check with an attorney when faced with a possible lawsuit related to sales tax collection (or any other suit).
For questions about whether and how Wayfair affects your business, please contact a member of the Business Team at the Law Firm of Conway, Olejniczak & Jerry, S.C..