What is the Wayfair Decision? And What Does It Mean for Your Small Business?

Small business owners know that sales tax can be tricky. Unfortunately, they got even trickier this year thanks to the Wayfair Decision. Let’s talk about what you need to know as a small business owner.

What is the Wayfair Decision?

Until recently, states could only require businesses to collect and remit sales tax if the company had a physical presence in the state, such as a brick-and-mortar store, a warehouse, an employee, etc. But on June 21, 2018, in South Dakota v. Wayfair, Inc., the Supreme Court decided that economic activity alone is enough to get you on the hook for sales tax.

Physical location is still a factor, but the addition of “economic activity” means if you sell products or services to customers in another state, you may need to collect and pay sales tax in that state. While Wayfair is applicable only in South Dakota, the ruling set the foundation for all other states to enact similar laws. So far, 40 of the 45 states that impose sales tax have done so.

What does the Wayfair Decision mean for small businesses?

There were thee parties involved in the South Dakota case: Wayfair, Newegg, and Overstock.com. All are large, global e-commerce businesses that agreed to start collecting and paying sales tax in all states after the ruling. Essentially, they all said they don’t expect the process to have any noticeable impact on their business. 

Of course, large companies have the resources to adapt. But complying with sales tax collection and remittance in all 50 states could be a huge burden on small businesses. Every state taxes products and services differently and has different filing requirements.

In its Wayfair opinion, SCOTUS highlighted three aspects of South Dakota’s tax system that provide some protection for small businesses:

1. Small business exception. An out-of-state business doesn’t have to collect sales tax until it has more than $100,000 in gross revenue from South Dakota sales or 200 or more separate transactions in the state in the previous or current calendar year.
2. Not applied retroactively. Businesses don’t have to collect or pay sales tax on past business transactions.
3. Committed to making sales tax less burdensome. South Dakota is a member of the Streamlined Sales and Use Tax Agreement, an organization of state governments focused on simplifying sales tax administration and reducing the cost of compliance for businesses.

Many states have followed South Dakota’s lead and exacted “economic nexus thresholds” similar to South Dakota’s small business exception. States with lower thresholds could be vulnerable to legal challenges should they try to enforce them.

Several federal legislative bills have also been introduced that would provide a de minimis exception – for example, if a company’s sales are less than $1 million, the company would be excluded from Wayfair compliance. However, nothing is on the books just yet.

Wayfair and service-based businesses

Many service-based business owners have ignored Wayfair, as they mistakenly believe sales tax applies only to the sale of physical goods. While this is true in some states, many states also tax services, and each has its own rules for which services are taxable and which ones aren’t.

As such, a service-based business may have to register and collect sales tax in more than one state. The sales tax compliance software company Avalara has a great chart that summarizes sales tax on services by state.

What should small business owners do now?

Every small business owner should take some time to review their state activity and determine whether Wayfair applies. Here are a few steps you should consider taking next.

• Determine which states you sell products and/or services, and where you do and don’t collect sales taxes.
• Talk to a trusted tax advisor for advice on how to track, collect and pay necessary taxes

If your business sells products or services in more than one state, and you aren’t collecting sales tax, keeping the “status quo” is risky. Your business could become responsible for paying the sales taxes you aren’t collecting from your clients and customers.Need help determining whether Wayfair will impact your small business? Feel free to set up a call with me! I can help you understand how the ruling may impact your sales tax collection requirements.