Supreme Court Upholds Internet Sales Tax Laws

Last Friday, June 22, 2018, the U.S. Supreme Court in the case of South Dakota v. Wayfair overturned its decision in the “Quill” case requiring a physical presence in the state before the need to collect sales tax. Now states can require the collection of sales tax by any entity and e-commerce site that sells product into the state (with exceptions.)

This decision was heavily influenced by the growth of the Internet economy and its effect on the States’ ability to collect taxes for the general welfare of its citizens. The dissenters to the decision said it was up to Congress to act.

Meanwhile, if you are selling product over the Internet, you need to pay close attention to the sales tax rules of the states into which you are selling. The court took efforts to point out that South Dakota was trying to protect the small retailer from burdensome effects as it did not require the collection of the sales tax until certain milestones were reached (e.g. $100,000 in sales or 200 transactions.) Further, they relied on the fact that the South Dakota statute was not retroactive. Further, South Dakota is among the 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

There already exist companies who have created a niche practice of guiding e-commerce sites on sales tax issues for a fee. Further, here is a link to Internet Sales Tax: A 50-State Guide to State Laws: .

Finally, this issue is more of an accounting issue than a legal issue. You should have a long conversation with your accountant on how they can help you with this issue.

E-Commerce Sites and Taxes

If you have an E-Commerce site, there will be many layers of taxes of which you should be aware. Luckily, the U.S. tax code provides many deductions and credits which you can use to offset your gains. Not all taxes discussed below will apply to every site.

1. Federal Income Taxes – If you run your site as a sole proprietor you will fill out Form C on your 1040. If your site is owned by an LLC which you have elected to be taxed at the individual rate, the LLC will do its own tax return and supply you with a K-1 which you will file with your normal 1040. If the LLC has shown a loss, you can deduct this from your other earned income. If your site is run by a Corporation it will have its own tax return.

2. State Income Tax – If your state has an income tax, the K-1 income will be used as it is for the 1040.

3. City Income Tax – Many cities have an income tax which you may also need to pay.

4. Employment Tax – If you have employees, you will need to withhold Social Security and Medicare taxes from their paychecks. Using a payroll service will greatly reduce your burden for figuring and filing this tax at a very reasonable price.

5. Self Employment Tax – If your K-1 shows a profit, and you do the work for the E-Commerce site yourself, you will be responsible for paying both the employer’s and the employee’s portion of the Employment Tax. This is a big burden, currently equal to about 15% of the LLC’s operating income. Sole proprietors have this same burden.

6. Withholding Tax – You need to pay your estimated total tax quarterly. Because you often do not know exactly what your tax will be for the year, the IRS has created a safe harbor if your quarterly payments equal your tax from the previous year.

7. Sales Tax – The sales tax rules for online sales are incredibly complex. There are products and services taxed in some states that are not taxed in others, and location of sales or your inventory is often a deciding factor on collecting sales tax.

Most sites know they must collect the sales tax for sales made in their own state (if their state has a sales tax), or in states where they have a physical presence. However, over the past few years most states have instituted online sales taxes (Often called the “Amazon” tax) using a different name and basing it on accumulated sales within their state. While this seems unfair, and may even fly in the face of the U.S. Supreme Court’s decision in the Quill case, most online retailers are now subject to these taxes.

You need to know what your sales tax liability is before you ship your product or provide your service so you can charge your customer the proper sales tax. Otherwise, if you are audited, you will need to pay the tax and the penalty without having had the chance to bill your customer.

As I said, the online sales tax rules are incredibly complicated. They have sprouted a whole new business niche for companies who will help you decide who to tax and how much to tax, and how to file the tax you collect. Of course these companies will charge you a fee for their services.

Don’t make the mistake of thinking you won’t get caught. Credit card companies routinely report your revenue to the States.

Please feel free to contact me with questions you may have about this blog article. However, your best bet is probably to speak to your accountant to make sure the layers discussed above that apply to you are being properly accounted for.