This article is provided for information purposes only and does not constitute legal advice.
On June 21st, the U.S. Supreme Court ruled that states are within their constitutional rights to collect sales taxes on purchases made from out-of-state online retailers.
The decision in South Dakota v. Wayfair overturned a 1992 ruling, known as Quill, that prohibited states from imposing sales taxes on companies that did not have a physical presence within the state.
What does that mean for your ecommerce business?
This ruling might mean you’ll need to register for, collect, and remit sales taxes in places you haven’t previously needed to. It’s too early to tell what’s going to happen next, but you’ll want to keep an eye on all states you sell to and any new sales tax legislations they could enact.
How do you know where to charge sales taxes?
Whether or not you need to charge sales tax in a state is decided based on an “economic nexus criteria,” and those criteria vary by state.
As an example, to trigger economic nexus in South Dakota, you would need to have $100,000 in taxable sales, or 200 separate taxable transactions delivered into South Dakota during the current or previous calendar year. If your business hit either of those criteria, you would need to collect and remit sales taxes in South Dakota.
In Ohio, on the other hand, you’d only trigger economic nexus if you sold over $500,000 worth of taxable goods within the state. After that point, you would need to collect and remit sales taxes in Ohio.
Each state has its own rules for sales tax. In some states, counties and cities also have this power—so you need to understand and update your tax practices as laws change across 12,000+ jurisdictions.
What’s next for state sales taxes?
Moving forward, Congress may enact one or more pieces of legislation:
- Marketplace Fairness Act (MFA)
- Online Sales Simplification Act (OSSA)
- Remote Transactions Parity Act (RTPA)
- No Regulation Without Representation Act
Each of these could directly impact how businesses like yours need to collect and remit sales taxes. If Congress doesn’t enact legislation to regulate interstate commerce, it’s possible that other states—in addition to those pictured above—could adopt their own nexus rules, since it would likely go unchallenged by the courts. Put another way, economic nexus could soon be the new norm.
On Shopify, you’ll have access to the same tools you’ve always had to collect sales taxes. All that’s changed is which sales taxes you may need to collect on a state-by-state level, and you can update your tax settings anytime in Shopify.
If you are a Shopify Plus merchant, we’ve created a separate article on accessing the automation benefits that are already available, South Dakota v Wayfair: Economic Nexus, Sales Tax & Ecommerce.
If you’re unsure how this changes your business’ tax obligations, we encourage you to speak to a tax professional, like a tax lawyer or an accountant. Below, we’ll cover a few of the most common questions you might have about this ruling and how it affects your business.
Is this ruling retroactive?
Based on the Supreme Court’s syllabus for South Dakota v Wayfair, no. But if or when states enact their own legislation on out-of-state sellers, the answer to this question may vary.
What if my business charges the wrong taxes?
Charging the wrong taxes could make your business liable for those miscalculations as well as various fines and penalties for noncompliance.
I have a physical location with POS, does anything change for me?
When you set up POS, you set a physical location for it. That should stay the same unless you take orders through POS that require shipping out of state to a state in which you need to charge sales taxes. Shopify already adds shipping and taxes to POS orders to automatically reflect the calculations you’ve set in Shopify.
What about pop-up shops or traveling markets?
While there may be exceptions, pop-up shops or temporary locations are generally considered to be a physical presence, which means many states already expected that you register and collect sales taxes. This ruling only affects physical sales if those orders are shipped out of state.
Does this affect international businesses?
Only if you’re registered to collect sales tax in the U.S.