Amazon sellers, here’s how the Supreme Court sales tax ruling affects you and your business.
Yesterday, if you were an Amazon seller, you might not have needed to collect sales taxes from most of your out-of-state customers. This may no longer be the case now.
Today, in South Dakota v. Wayfair, the Supreme Court held that a state that previously couldn’t force out-of-state online sellers to collect sales taxes, may now be able to do so.
In other words, sellers without a physical presence in a state, may still be on the hook for collecting sales taxes.
What does this mean practically?
1) FBA Sellers: Don’t just look at Amazon’s warehouse locations
If Amazon holds your inventory in an out-of-state warehouse, do you have to collect sales taxes? This is a long-running and often-debated question.
Some sales tax software providers argued YES, you owe sales taxes in every out-of-state warehouse with inventory. The argument was that when Amazon houses your inventory, this is a physical presence in the state which establishes substantial nexus, i.e., enough connection for states to tax you.
Less willing sellers argued NO, because Amazon is the one who moves the inventory around–not the seller.
Today, in Wayfair, the Supreme Court didn’t ask about physical presence or warehouses (they abandoned the physical presence test from Quill).
The Court simply asked about “economic and virtual contacts,” i.e., whether a seller did substantial sales in a state. In Wayfair, $100k or 200 orders were considered substantial sales.
Which goes on to my next point….
2) FBM (Fulfilled by Merchant) Sellers: You may owe sales taxes in more states now
Most FBM sellers only pay sales taxes in the states they live in or the states they manage inventory and orders from. Wayfair potentially marks a huge change.
The Supreme Court allowed states to require sellers to pay sales taxes if they get the ‘substantial privilege of carrying on business’ in their state. 200 orders or $100,000 in sales = substantial privilege.
Furthermore, the Supreme Court did not say that these numbers were the bare minimum, i.e., you could see potentially lower numbers being considered substantial in the future. FBM sellers, if you do substantial sales in many states, prepare for the possibility you may now be required to collect sales taxes.
What comes next?
A few things may happen.
One, and most likely, Wayfair opens the door for others states to begin collecting sales taxes from out-of-state sellers under sales tax legislation like the one in South Dakota. The court commented positively on South Dakota’s sales tax legislation because:
- Sellers who did limited sales were still safe
- South Dakota didn’t go after past unpaid sales taxes, and
- South Dakota adopted a uniform system adopted by 20 other states and offered access to subsidized sales tax software (making compliance less costly)
Some states may also potentially pass some of the burden on to Amazon to compel sales tax collection.
Two, Congress may pass its own legislation, especially if more disputes arise over state sales tax legislation.
Three, out-of-state sellers may try to make new arguments on why they should not be required to collect sales taxes. The Court offered no final answer on this. The Court explained that “these [other claims and issues sellers can make under the Commerce Clause] have not yet been litigated or briefed, and so the Court need not resolve them here.”
Things don’t look hopeful given the court’s tacit approval of South Dakota’s new out-of-state sales tax legislation (for the reasons described above).
If you’re an Amazon seller doing substantial sales out-of-state, you may now have substantial sales tax compliance work ahead of you.
Disclaimer: I’m a lawyer. Just not your lawyer.
The opinion can be read in full length here.