Bricks-and-Mortar to Mail Order
Sales taxes have been around a long time; in the United States, individual states began enacting sales tax legislation on a widespread basis beginning in the 1930s. As of this writing, all but five states have adopted some form of sales tax (the “NOMAD” states are the lone holdouts: New Hampshire, Oregon, Montana, Alaska, and Delaware).
Sales tax was relatively easy to calculate when these laws were first enacted, a time when most sales were made at local bricks-and-mortar shops. When buyer, seller, and shop were all located in the same place, everyone agreed on which state’s sales tax applied. It wasn’t until the rise of mail order that the system first began to experience growing pains.
Catalog-based retailers presented a new challenge to states collecting sales tax. Sales tax laws were premised on the state’s ability to tax transactions that occurred within its borders. Now a purchaser did not have to be physically present in a state to make a purchase: they could mail in an order form or make a phone call and have their purchase shipped to them tax-free. As the number of mail order sales increased, more retailers shipped their goods into other states without collecting or remitting any taxes to those states. Over time, states began looking for ways to recapture this lost revenue.
The Need for Nexus
In 1992, the Supreme Court decided a case called Quill Corporation v. North Dakota. Quill Corporation sold its products to North Dakota residents via catalog, ads, and phone calls. It had no offices or warehouses in North Dakota nor did it have any employees located in the state. The state of North Dakota nevertheless filed a collection action, seeking to compel Quill to pay sales tax on its sales to North Dakota residents.
In a landmark decision, the Supreme Court held that North Dakota did not have the power to collect sales tax from out-of-state companies like Quill. A state was permitted to impose sales taxes, the Court reasoned, if the state could show a strong connection, or “nexus,” between the seller’s business and the state. Significantly, the Court defined that nexus in terms of physical presence in the state. Without an office or warehouse or employees in the state, there simply wasn’t enough of a physical connection between North Dakota and Quill to allow the state to impose its sales tax law outside its borders.
Quill was a controversial decision from the get-go. Bricks-and-mortar stores worried that they would lose customers to out-of-state retailers who didn’t have to charge sales tax, especially on big purchases. State and local governments protested the loss of tax revenue, estimated at one point to be five to ten billion dollars a year. Once the internet began to dominate the way consumers shopped, dissatisfaction with Quill rose to new heights. The “Kill Quill” movement was born as states and shop owners urged the Supreme Court to reconsider its ruling. Significantly, Justice Kennedy wrote a concurring opinion in a 2015 case hinting that the Supreme Court might finally be willing to reconsider the Quill decision. States quickly began enacting aggressive new sales tax laws, hoping to trigger a lawsuit that would give the Supreme Court an opportunity to overrule Quill once and for all.
South Dakota was one of the first states to enact a Kill-Quill law. Its new sales tax law didn’t evaluate the physical connections between a retailer and a state to determine if sales tax was due; instead it focused on the economic ties between the retailer and the state. In 2017, the state’s attempts to collect sales tax from several large on-line retailers led to a lawsuit that ended up before the Supreme Court.
In a decision called South Dakota v. Wayfair, published in June 2018, the Supreme Court overruled Quill, holding that states can apply their sales tax laws to out-of-state retailers even if the retailer has no physical presence in the state. The Court was swayed by societal changes since Quill – both technological changes that made it easier for businesses to calculate multiple tax rates as well as the sharp growth in the number of internet sales.
Although the Court’s ruling was clear – physical presence was no longer the test to determine if a company must pay its sales tax – it was a bit short on detail. The opinion did not articulate a test for determining whether a retailer’s economic contacts with a state were enough to justify the imposition of sales tax, saying only that the necessary nexus “is established when the taxpayer or collector avails itself of the substantial privilege of carrying on business in that jurisdiction.”
Wayfair and Beyond
Now that Wayfair is the law of the land, how can you, the craft retailer, determine if you are liable to pay sales tax in a particular state? We know from Wayfair that physical presence in a state isn’t the deciding factor, so looking at the places where you’ve physically sold product – where your warehouse is, say, or out-of-state shows you’ve vended at – no longer controls. Instead, you’ll also need to consider your economic ties to each state.
The South Dakota law examined by the Court in Wayfair considered two benchmarks in determining a retailer’s economic nexus: (1) how many sales the retailer made to South Dakota residents; and (2) how many individual transactions took place with state residents. (Specifically, the obligation to pay South Dakota sales tax was triggered if a company’s sales to South Dakota customers totaled $100,000 or more annually, or if the business made 200 or more individual transactions with South Dakota customers annually.) The Court indicated that these benchmarks would create a sufficient nexus with the state to justify imposing sales tax on the retailer.
Other states, eager to cash in by collecting more sales tax, modeled their new sales tax laws on South Dakota’s. These new laws generally look to the same two factors, dollar amount of sales in the state and number of transactions in the state, to determine whether an out-of-state company must pay sales tax. Many states decided to play it safe and adopt a law that was very similar to South Dakota’s, using the same benchmarks. Other states chose to use South Dakota’s law as a template but adopted different benchmarks. The result is a crazy quilt of laws that differ from state to state.
Figuring Out What You Owe
While the exact requirements of each state’s law vary, the impact on your business is the same: you must now figure out where you are now liable to pay state sales tax and then take steps to comply with the applicable sales tax laws. Sound overwhelming? Let’s break it down.
#1: Track your sales.
The first step in becoming Wayfair-compliant is to examine your sales history, collecting the information you’ll need to determine if each state’s tax law applies. That means you’ll need to calculate the number of sales you’ve made in each state and the total dollar value of those sales. An effective POS or accounting system is essential so that you can sort transactions by state or zip code and determine the dollar amount of each transaction.
Use this information to create a spreadsheet or chart showing each individual state, total dollar value of transactions in the past calendar year, total dollar value of transactions in the current year, total number of transactions in the past calendar year, and total number of transactions in the current year. If your current method of bookkeeping doesn’t allow you to do this quickly and easily, it’s time to consider upgrading.
Determine where you stand automatically:
If you’re selling through the popular eCommerce platforms and want to automate determining where you have economic nexus, we recommend the free Sales & Transactions Checker. A free trial of TaxJar is required and the tool will connect to the places where you sell. The tool will then review your sales data and cross-reference all of the various economic state thresholds to tell you exactly where you may have economic nexus. TaxJar connects to Etsy, Shopify, Amazon, PayPal and many other eCommerce platforms.
#2: Know your nexus.
Once you’ve collected your sales data, you’re ready to examine your business’s nexus to each state. Cross the easy ones off your list first: if you haven’t made any sales in a particular state, then you have no economic nexus for that state. Depending on the size of your business, you’ll likely be able to whittle down the list to a more manageable subset of states.
Next you’ll need find out exactly what economic nexus triggers the obligation to pay sales tax for each of the remaining states. Look up the state’s sales tax law online or find a reliable on-line summary of state sales tax laws. The website TaxJar, for example, maintains an extremely helpful survey of each state’s sales tax requirements here.*
Many states have adopted the same economic nexus test as South Dakota: $100,000 in sales or 200 transactions. Smaller retailers will be exempted from sales tax in many states due to these relatively high requirements. You’ll have to check each state individually, though, because state laws vary, sometimes significantly. For example:
- The benchmarks – the number of transactions or total amount of sales – may differ.
- The benchmarks may be either/or. Some laws trigger the duty to pay sales tax if only one factor is met; others only if both criteria are met.
- Some laws look to the previous year’s sales history to determine if tax applies, while others look at the current year, too.
- Some states don’t require retailers to remit sales tax but do require that you submit sales reports to them. These “notice and report” states may also require that you post some kind of notice to purchasers from that state (perhaps advising them of their personal obligation to submit sales tax).
#3: Set up a compliance schedule.
At this point, you’ll be left with an even narrower subset of states where you’ll need to take action. Here’s where things may get tricky. Review each state’s legal requirements. Again, you can research each state individually, use an on-line summary, or consult a professional legal or tax adviser for this information. Generally, if you satisfy a state’s economic nexus, then you will have to do three things to comply: (1) register for a business permit in that state; (2) collect that state’s tax from purchasers; and (3) remit the taxes to the state. State government websites often have a specific landing page for questions about doing business in the state, and these can be very helpful in figuring out exactly how to accomplish those three things.
To request help with sales tax registrations in any state, visit taxjar.com/helpme and their CPA partners can assist in getting you registered in as many states as you need.
There are a few additional wrinkles to keep in mind throughout this process:
- Check each state’s deadlines carefully. Oklahoma, for example, requires compliance on or before June 1; Pennsylvania’s deadline is in March; Arkansas’s sales tax rule hasn’t gone into effect yet. Mark your calendar with these deadlines so you don’t miss them.
- Monitor sales in certain states. Nevada’s law requires you to tally sales and transactions per calendar year. Oklahoma looks to transactions from the previous twelve months, which means that one particularly good month of sales could put you over the top of the threshold before the calendar year is done.
- Don’t forget about notice-and-report states. A few states like Pennsylvania require that you submit sales reports and provide certain notices to customers from that state. Review these requirements carefully and comply with them.
- Understand your options. Some states have adopted a streamlined process for sales tax compliance called the Streamlined Sales Tax Registration System (SSTR). The idea is to create a central place where sellers can register with all SSTR states in one shot, instead of registering with each state individually. Check to see if using this service will speed up your compliance process. And ensure that you’re only registering in the states where you have nexus, and not volunteering to comply in states where you have no obligation.
- Determine if you are using a “marketplace facilitator.” If you sell on a marketplace website like eBay or Amazon, you may discover that the marketplace forum is already collecting and remitting sales tax for the sales you make using those platforms. Amazon’s website contains a concise summary of how it collects and remits sales tax for certain states. Know how this affects your obligations if you sell on a third-party site.
TaxJar has a helpful overview (https://blog.taxjar.com/sales-tax-by-state-marketplace-facilitator-laws-explained/) that details all of the marketplaces facilitators and where collection is currently required by state and by provider.
Get professional help. Given how complicated this system of state laws is, and given the costs of compliance (or noncompliance!), seeking advice from a professional – an attorney, an accounting specialist or a tax adviser – is wise. Compliance with Wayfair isn’t particularly easy and it may be worth outsourcing some of this work so you can focus your attention on other aspects of your business.
#4: Keep an eye out for future changes.
Because this area of the law is in flux, you’ll need to stay updated on changes and revisions to state sales tax laws. Periodically recheck the state’s threshold requirements for sales tax because these can change over time. Some states have not yet enacted a post-Wayfair sales tax law but are planning to, so you’ll also need to know when new sales tax laws show up on the books.
Now is also a good time to revisit your bookkeeping system. You may want to make changes to your system to make it easier to comply with sales tax laws. You’ll also want to confirm that your point of sale system is calculating and adding the correct amount of sales tax.
Sales tax compliance isn’t fun, but it has become a necessary part of doing business across state lines. If you’re looking to automate sales tax for your craft business in any state, take a moment to check out TaxJar to save time so you can get back to your craft. If you’re not selling enough to pay for a separate service to manage your sales tax, lean on their education resources through their blog to help keep you up to date on the state changes as many laws are changing after Wayfair. Keep informed, keep tracking your sales carefully, and when in doubt, get advice from a trusted professional or technology provider.
*The TaxJar website even has an online tool that will automatically check your transactions for you and flag where compliance is required. (Note that TaxJar is offering a free trial of the sales and transactions checker; after 30 days, monthly subscriptions are required to continue using the service.)
Note: This article is provided for information purposes only and does not constitute legal advice or create an attorney-client relationship. While every attempt to provide updated information was made, specific state laws and their requirements may change. If you have questions about sales tax or other legal issues, consult a qualified professional. This article reflects the personal opinion of the author and not her employer.
Carol J. Sulcoski is an attorney by day and a knitting author, designer and dyer by night. Her latest book is “Yarn Substitution Made Easy” (Lark Crafts 2019). She lives outside Philadelphia with her three nearly grown-up children and a fluffy orange cat.
I hope they are going to come up with something simpler, because this is insane for a small shop. I’m one person working in a spare bedroom selling a few mugs on Etsy. So far, I am fine. But 200 sales is not a massive thresh hold. So that could become an issue at some point. I did not realize business licensing was required in the other districts if sales thresholds are met. That’s completely ridiculous. I have mine in my own city, of course. But it requires I also pay property taxes to keep it up. And the license itself is $50 every year. Business Licensing is generally by city or locality, so is the 200 sales in a city or a state? What city would I have to get my business license if I made 201 sales in California next year. That’s a pretty big state!
This kind of thing is really a problem for a smaller shop. Thankfully, pdf downloads are immune. But I have enjoyed starting my mug side line, and people like them as well. Still, I don’t make enough money to buy another monthly business subscription to manage all of this. It’s not exactly a high margin business. I was hoping to add shirts at some point, but maybe it’s not even worth it. I wish they would just have it so you charge and remit sales tax in the state where you are head quartered. That makes sense to me. I do my own state sales tax now, so having those charges for all sales would be logical, and reasonable to manage. Expecting people to handle it in all localities in the country is not reasonable at all. I’m definitely interested in hearing what others think, and how they are going to manage this.