The Fuzzy Math by States in Sales Tax Case South Dakota v. Wayfair
Just a few weeks ago the US Supreme Court in South Dakota v. Wayfair, Inc. decided that physical presence to establish sales tax nexus in a state is no longer is valid.
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READ MORE: Supreme Court Decision on Sales Tax – But What Does It Mean?
Among other considerations, the Court looked at South Dakota’s law that requires remote retailers to collect and remit sales tax when their annual sales exceed 200 individual transactions or $100,000 in sales.
Furthermore, the Court seemed to accept that this minimum threshold does not violate the Commerce Clause of the US Constitution’s undue burden requirement.
But did the Court do the math?
Using the South Dakota law’s minimum threshold, it appears the state assumes that the average online sale is around $500 per transaction ($100,000/200 = $500).
And the court went along with this… But is that really accurate?
Actual Minimum Threshold Maybe ~ $17,000!
There is no shortage of studies that look at the average value per online transaction. So we decided to look at data from a commonly referred to statistics site called Statista.
A brief look and some simple math immediately shows us that the average online order is really around $85 per transaction (based on the last 5 reported quarters in the graph).
That places the real minimum threshold for remote sellers to be around $17,000, not $100,000.
In many online groups, small sellers often discussed the $100K requirement without actually considering the 200 transaction requirement.
Unless a merchant sells a lot of high-priced items, the fact is that most merchants may even sell less than this average and are more likely to face sales tax reporting requirements based on the number of transactions into a state, not the annual sales revenue.
Certainly for a state like South Dakota, with under 1 million residents, this threshold may work. But what other states?
In supporting briefs and reviewing laws that have been passed or are under current consideration by state legislatures, it appears the States want to stay close to South Dakota’s minimum for any size state.
Is that a fair interpretation of undue burden? Shouldn’t the undue burden requirement the Court now says States need to consider for Nexus be a sliding scale?
If considered as a sliding scale, based on South Dakota’s law (and for simplicity rounding up the South Dakota population to 1 million and rounding down each State’s population to the nearest million), the minimum requirements for the top 5 most populous US states should be:
- California (39,536,653) – $3.9 million or 7,800 transactions
- Texas (28,304,596) – $2.8 million or 5,600 transactions
- Florida (20,984,400) – $2 million or 4,000 transactions
- New York (19,849,399) – 1.9 million or 3,800 transactions
- Pennsylvania (12,805,537) – 1.2 million or 2,400 transactions
So, what are the chances the States will take this “reasonable” approach?
Congressional Action Needed
Unless the US Supreme Court wants to take up a few more cases to more definitively “define” the undue burden threshold based on the population of states, it seems the only fix to this open-ended problem is for Congress to act.
Between the actual sales volume threshold not being anywhere near $100,000 for most merchants, and a 200 transaction minimum that may be reasonable for South Dakota but not for more populous states, when sales tax enforcement kicks in, it seems there are valid questions on what defines undue burden to collect, report, and remit sales tax on small business sellers.
States, not willing to give up their authority to set whatever minimum burden they believe is appropriate, may not be that willing to work with Congress to come up with a solution.
So, without Congress, one can only envision more sales tax cases making it to the Supreme Court, and that begs the question, was anything solved with the Wayfair decision?
READ MORE: Sales Tax Discussion with Paul Rafelson – Online Merchants Guild
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Richard is co-founder of eSeller365. He has over 17 years of experience on eBay which includes tens of thousands of sales to buyers in over 100 countries and even has experience with eBay’s VeRO program enforcing intellectual property rights for a former employer. And for about two years Richard sold products on Amazon using Amazon FBA in the US.
To “relax” from the daily business grind, for a few weekends a year, he also works for IMSA as a professional race official.
Figuring out the sales tax for the items I sell for every state I ship to is such a pain, and it gets even worst when you get to crunch the numbers at the end of the year for income taxes. My business is too small to have my own accountant and so doing this every year bring nightmares. Thank you for the article.
The concerns you are voicing are exactly what the onlinemerchantsgroup.org is trying to defend. Micro businesses may have a proportionally higher impact on their bottom line due to these changes. Fundamentally, marketplaces may have to take up this issue and offer services to collect, report, and submit sales tax on sales. But if more sellers go to marketplaces, it will raise the prices of some goods as they have to consider the cost of doing business on a marketplace.
Thank you for your comment,
Richard Meldner — I don’t get it. My state Arkansas legislated this: “”All remote sellers and marketplace facilitators are required to collect and remit Sales and Use tax to the State of Arkansas if within the current or previous year the sale of tangible personal property, taxable services, a digital code, or specified digital products for delivery into Arkansas exceeded one hundred thousand dollars ($100,000) or two hundred (200) transactions.”
I just bought a $75 item on ebay from a very small seller (feedback 167). Ebay collected the sales tax. The Seller claimed I was only the second person from Arkansas who he ever sold to. SO, how is collecting a sales tax on my transaction justified?
Can you explain that please?
eBay is the marketplace facilitator, therefore all sales on eBay are grouped together to meet the threshold. Some states have thresholds on marketplaces, others don’t. Because of eBay’s total volume, it is going to exceed all thresholds in any state if they have them.
I hope this clarifies it.