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It’s a Brave New World… For Sales Tax

Sales tax isn’t the first thing most business owners consider when they set up shop or sell their first widget online, but it is one of the issues that confound even the most experienced business owner. Generally, Ohio businesses that sell tangible property (e.g., books, bicycles, or basketballs) directly to consumers at the company’s brick and mortar location must collect the state and local sales tax. The amount taxed should come from the total amount of the sale and remit to the State of Ohio through regularly-filed sales tax returns. There are various exemptions and exceptions to this general rule, but sales tax is the least complicated scenario in which sellers find themselves collecting and remitting sales tax.

But, what if an Ohio seller makes sales of tangible personal property, or provides taxable services, to buyers not located in Ohio? What if the item/service sold is not taxable in Ohio but is subject to sales tax in the purchaser’s state? When is an Ohio seller obligated to collect and remit another state’s sales tax? These are just some of the situations in which many sellers find themselves. The answers to these questions have never been simple, but as of June 2018, the solutions changed, creating additional complexity and burden for all sellers making sales across state lines.

The United States Supreme Court decided South Dakota v. Wayfair, Inc this past June. The landscape forever changed regarding whether a seller can collect and remit another state’s sales tax. The Wayfair decision permits states to enact “economic nexus” laws at their most basic level. In other words, a state can exert jurisdiction over an out-of-state seller if that seller’s sales to consumers in that state are over a specified threshold amount or the seller engages in a certain number of transactions. For example, an Ohio seller who makes $100,000 from online widget sales to buyers located in the State of Illinois (or 200 separate transactions to buyers in Illinois) must register with the Illinois Department of Revenue and collect and remit sales tax for all subsequent taxable sales within Illinois. Before Wayfair, a seller generally had to have a physical presence (e.g., a branch office, sales representative, or employees) located or conducting business in a state to be subject to that state’s sales tax laws.

In anticipation of the Supreme Court’s decision, many states proactively enacted legislation permitting an economic nexus scheme to be ready and waiting, pending the outcome of Wayfair. Accordingly, it is more imperative now than ever that vendors selling across state lines understand the location of their buyers, the amount sold into different states, and how many transactions are in other states. Several of these new laws took effect on October 1, 2018. Still, many are not effective until January 1, 2019, so there remains time for business owners to review their sales and identify applicable jurisdictions. Ignoring a potential problem won’t make it disappear, but proactively addressing it will keep other states from knocking at your business door.