In recent years, the sale of products online by independent sellers have reached all-time highs because of websites such as Shopify, Amazon, and Alibaba. Big name-brands have also jumped into the online sales business with large capital investments into the sale of products online. Recently, Tesla announced that they would be shutting down all their dealerships and selling their automobiles exclusively online.
In 2018, total online sales grew 15% from $449.88 billion to $517.36 billion. These trends are expected to grow exponentially over the next five years. These types of companies are effectively referred to as ecommerce. However, it is not just the big businesses that have been investing in ecommerce and online sales. Even small companies and families setting up a side-business have jumped into the online sales market through a concept referred to as drop shipping.
Drop shipping is when a person buys a product (such as a t-shirt) online. The payment goes directly to the owner of this website, and a third-party wholesaler fulfills the order and ships it to the customer. The website and online store owner are holding no inventory in this transaction. This results in many more people getting involved in ecommerce, even if they are simply using it to make a little extra money each month.
If this describes you, pay attention! You may have a tax issue!
The United States Supreme Court recently decided the case of South Dakota v. Wayfair. In this case, the Court had to decide whether an out-of-state retailer, with no physical presence in the state that sells and ships products to the state, must collect sales tax on behalf of that state. In this case, the Court decided that the state could require the out-of-state business to collect sales tax.
Specifically, as it applied to South Dakota, the state’s rule was when an out-of-state retailer sells and ships products with more than 200 transactions or $100,000 per year, that retailer must collect and remit sales tax to the state of South Dakota.
37 states have enacted laws similar to South Dakota in response to the Wayfair decision regarding when the collection of sales tax applies to out-of-state retailers.
What does this mean for online retailers or anyone who sells products online?
Unfortunately, it depends. You will need to check each state to which you ship products. Each state (a total of 37 so far) have different laws and rules for collecting sales tax as a result of the Wayfair decision. Some of these states have physical presence requirements, some have a specific dollar figure requirement, and some have requirements for any and all sales shipped into the state. Before you ship another product from your online store, you should speak with a tax attorney about current law in your state.
Does this court case apply if you have an online store through Shopify and you own no physical inventory?
Again, unfortunately, it depends. Before you sell another product through your online store you should speak with a business and tax attorney to determine your sales tax collection liabilities.
What if you just ignore this case and only pay sales tax in your home state?
First, VERY BAD IDEA!
The failure to collect and pay sales tax is taken very seriously by each state taxing authority. You can be held personally liable for not paying. You can be forbidden from shutting down your limited liability company (LLC) or corporation if you have unpaid sales tax. Interest and penalties will usually apply. You can also be forced to stop doing business in that state due to unpaid sales tax.
Why do states take this so seriously? The answer is quite simple. It is because the sales tax you collected is not your money or your revenue. You are simply collecting the money for the state and sending it to the state. For this reason, the state taxing authorities are less than forgiving and less willing to cut you a break for sale tax you failed to pay.
If you sell products online or have an ecommerce store, it is important that you stay compliant with current tax laws. Nothing is scarier than an audit letter from a taxing authority that you owe thousands of dollars in taxes and penalties.
For more information:
If you are concerned regarding whether your business is compliant with current tax laws or what you can do to protect your business and personal assets, contact the business and corporate attorneys at Aronoff, Rosen & Hunt for an initial consultation.
We look forward to hearing from you!