In a landmark Supreme Court sales tax ruling of South Dakota v. Wayfair, Inc, the Supreme Court ruled that States may require online sellers to collect and remit sales tax in states where they have no physical presence. Up until this ruling, online sellers have been required to collect and submit sales tax in states where they have nexus- or, physical presence.
A 1992 Supreme Court sales tax ruling, Quill Corporation v. North Dakota provided an advantage to online sellers when it was decided that states were prohibited from requiring businesses to collect sales tax in states where the business had no physical presence. Brick and mortar businesses have long disputed this advantage, claiming that they miss out on sales because of the tax free online pricing.
Which Shopify Sellers Are Affected?
The new US Supreme Court ruling affects the following online sellers:
US Based Businesses
If your business is set up in the US and uses a US address, you will be expected to comply with new sales tax regulations.
International Sellers with US Warehouses
If your business is set up outside of the US, but you use FBA or another warehouse service to store product and fulfill your orders, new sales tax regulations apply to you. It is unclear right now if dropshipping from a US supplier will exempt you from any new sales tax regulations. We will have to wait to see how it unfolds.
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So, What Now?
Take a deep breathe and don’t panic. Experts estimate that it will take at least 60 days for any states to change their current policy and begin to require that online sellers collect and remit sales tax on their behalf.
When states outside of your nexus state begin to announce their new sales tax requirements, you can adjust your current sales tax settings in the Shopify Taxes settings to apply sales tax to products sold in the new states.
Reporting on and remitting the sales tax will be the tricky part, as every state has different systems and requirements. For example, my Nexus state is Florida. Each month, Shopify sellers based in Florida log into their Florida Department of Revenue sales tax accounts to report and pay Florida sales taxes online. Once additional states begin to require the remittance of sales tax for their states, this process and the reporting will quickly become too tedious and time consuming.
The Sales Tax Solution is Simple
Last year, I received a few too many late fees for failing to remit my sales tax payment on time. It is a hassle and my least favorite part of ecommerce. An ecommerce friend of mine suggested TaxJar. I signed up for the TaxJar 30 day free trial and was immediately impressed.
TaxJar is an approved Shopify app that seamlessly integrates with your Shopify sales data. Within minutes it pulls out sales tax payments and creates monthly reports detailing the exact amount of taxes that are due.
The AutoFile feature will compile the necessary data for your monthly sales tax filings, file the return and remit the sales tax payment to the required state. If you sell on multiple sales platforms, you can integrate all of the platforms into your TaxJar account within minutes for one, complete report and filing.
The Short and Sweet
Although Shopify sellers will likely see changes to the sales tax regulations due to this Supreme Court sales tax ruling within the next 6 months, collecting and filing the required taxes to the necessary states doesn’t have to be a major headache. Automating the boring part of online business, like sales tax, helps us to focus on the best part of online business- SELLING!
Click here to start your 30 day risk free trial with TaxJar.
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Hi Julie – Collecting and remitting is definitely doable with software like TaxJar. However, what will be difficult for small businesses is following the process to register for a sale tax id number.
In many cases, in order to do this, you must have a business setup in that state. That means a small business would have to foreign register, pay the business fee (any where from $50 – $500 yearly), and then get the sales tax id number.
Now that you have a business in those states, you’ll have to complete state taxes for that state each year. Can you imagine doing this for all 50 states? Not possible for a small business owner.
There is a tremendous amount of burden on the small business owner and I’m hoping Congress can simplify ecommerce state sales tax laws to make sure innovative and creative small business owners can continue to build and thrive.
Hi Mike,
You certainly bring up some valid concerns. Typically businesses do not need to register their business in a different state to receive a sales tax permit. For example, in Pennsylvania and Florida, filing for a sales tax permit is free and involves a single form. The initial set up for filing sales tax in each of the 50 states will be the hassle, but it is not yet known which states will even take advantage of this ruling. Once the sales tax permits are obtained, TaxJar handles the sales tax filing in each individual state eliminating the headache for small business owners.
Hey Julie – I actually think it depends on the state and the type of business…
For example:
For Pennsylvania, a corporation is required to foreign qualify to do business after they apply for a permit because after you get a permit, the secretary of state shares that info with the corporate division and they require a corporate tax return. However, this isn’t true for Sole Proprietors or LLCs.
For Florida, they require all corporations with sales to file a state corporate tax return. But again, this doesn’t apply to Sole Proprietors or LLCs.
For New Jersey, you are able to apply for a sales tax permit without foreign registration, but foreign registration is still required for all businesses (including LLCs). So you do actually need to foreign qualify even though you can get a sales tax permit without it to start.
For Kentucky, again, all Corporations and LLCs with sales in Kentucky must foreign qualify and are required to file a business tax return.
For small businesses, the real problem is the overall process, which includes the following:
– Determine if you have Nexus (buildings, employees, inventory, etc) or are over the revenue threshold (each state is different)
– Foreign Register (depends on the state and type of business)
– Apply for a Sales Tax Permit
– Create a Sales Tax Account
– Collect Sales Tax
– Remit Sales Tax (monthly or quarterly or yearly, depends on sales)
– Renew Sales Tax Certificates (depends on the state)
– Pay an accountant to complete tax returns for each state
– Pay annual state business fees (each state is different)
Ugh! Unless Congress makes it simple, or there is a straight-forward simple and affordable service that helps a small business navigate through all of this (not just Tax Jar for remitting), the small business owner who makes a living by selling products online is done…
Wow! That sounds so negative… Sorry! Just trying to be real… Talk to me… What do you think small business owners should do!?!?
There are certainly a lot of unknowns. New laws in each state will have to be passed to stipulate any changes, so at least we have time to figure things out. I suspect that when the new state laws are made, they will include simple ways for online businesses to register for a sales tax permit without registering as a foreign entity. I have also already spoken to my account manager at Tax Jar and they are already working on additions to their platform that will help online sellers with creating sales tax accounts and understanding how much we will have to collect and from which states. For now, it is business as usual for me and we will have to see how the dust settles.
I live in the states and will begin dropshipping using international suppliers. As a dropshipper, physical control, warehousing, and shipping are the responsibilities of international suppliers.
Since I do not have rights to the products and there is no transfer of title until an order is placed with suppliers, does the ruling apply?
I understand why the ruling applies to wholesale and private labeling, but I’m not clear on dropshipping. When I place an order, title transfers to me. Does this trigger the ruling?
Many thanks!
If your business is established in the US, the sales tax rules will apply. Right now, you are only required to collect and remit sales tax in your nexus state (where your business is registered). In the future, due to this ruling, additional states could require online businesses to collect and remit for their state, as well. The sales tax requirements considered the state where your business is located and the state to which you ship. The physical location of your dropshipper does not come into question.
[…] previously wrote about the effect of the Supreme Court sales tax ruling and what it means for Shopify sellers in Florida. Reporting and remitting sales tax can get tedious, and is one of the many aspects of running your […]