The laws governing state taxation of online business transactions is in the process of a major evolution. The change began with a holding from the Supreme Court of the United States (SCOTUS) in June of 2018.
What led to the change? The country began to change state taxation laws in South Dakota v. Wayfair. This case addressed the legal issue of when a state can tax a business for an online transaction.
Essentially, SCOTUS allowed South Dakota’s new definition of a nexus to stand. The term nexus is a legal one that refers to a business’ connection to a state before the state can require a tax obligation. This change in the definition of nexus resulted in a shift from a focus on a business’ physical presence in the state to a checklist of criteria that included the number of transactions conducted in the state and the amount of transactions.
A more detailed discussion of the case was covered in a previous post, available here.
It was only a matter of time before more states attempted similar taxation measures — and so they have. A reported ten states recently passed state taxation laws similar to the one used in South Dakota. They are Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, North Dakota, Washington and Wisconsin.
Will these new iterations of the law survive? It is very likely these laws will face additional legal challenges.
Critics point out the states have passed laws that are very similar to the one used by South Dakota. Although on paper it would make sense to use what was already approved by the highest court in the nation, the reality may not stand. Critics argue these states conduct a significantly larger portion of business than South Dakota and should, at the least, have proportionally higher transaction requirements than their smaller counterpart.
Whether or not the laws passed by these states will survive a legal challenge is not yet known. It is clear SCOTUS has changed how state sales taxes are applied to online transactions, but the nuances will still need clarification.
What is the take away lesson for businesses from this situation? Any business that conducts online transactions should remain aware of this situation. The evolution of tax law will very likely impact your business. As such, it is wise to continually review your tax planning strategy to better ensure it accounts for any potential changes to your business’ state tax obligations.