By Alicia Nesline Shaw, Attorney, Carlile Patchen & Murphy LLP
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 confounds even the most experienced business owner. Generally, a company located in Ohio that sells tangible personal property (e.g., books, bicycles or basketballs) directly to consumers at the company’s fixed business location, must collect the state and local sales tax on the total amount of the sale and remit that money to the State of Ohio through regularly-filed sales tax returns. There are various exemptions and exceptions to this general rule, but this 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 who are 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 answers changed, creating additional complexity and burden for all sellers making sales across state lines.
This past June, the United States Supreme Court decided South Dakota v. Wayfair, Inc., and the landscape forever changed regarding whether a seller can be compelled to collect and remit another state’s sales tax. At its most basic, the Wayfair decision permits states to enact “economic nexus” laws, which means that 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, as of October 1, 2018, an Ohio seller that makes $100,000 worth of online widget sales to buyers located in the State of Illinois (or 200 separate transactions to buyers located in Illinois) must register with the Illinois Department of Revenue and collect and remit sales tax for all subsequent taxable sales within Illinois. 35 ILCS 105/2(9). Prior to 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 in order 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 where their buyers are located, how much is being sold into different states, and how many transactions in other states are being conducted. Several of these new laws took effect October 1st, but 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 go away, but addressing it proactively will keep other states from knocking at your business door.
It's a Brave New World... For Sales Tax