Where does my online business owe sales tax?

For years, online retail has been taking over an increasingly large portion of the market share as compared with brick and mortar stores. The coronavirus pandemic and resulting shelter-in-place orders have made it even more essential for retail businesses to transition online in order to continue to maintain relationships with customers. And operating a website with online sales can expand your business’ reach to a much wider market share, allowing you to access customers from across the country.

However, as you consider making the shift to online sales, you should be aware of potential additional compliance obligations associated with doing business across state lines, including potential state sales tax liability. In a 2018 decision, the Supreme Court held that an e-commerce company that does a substantial amount of business with a state may have a sufficient “economic nexus” with that state to justify the imposition of state sales tax registration and collection requirements, even if the business has no physical presence or employees there (see South Dakota v. Wayfair, Inc.). Therefore, even if you are registered to collect sales tax in the state where your business is headquartered, you may also be responsible for sales tax in the state where your customer resides.

In response to the Court’s Wayfair decision, most states have passed legislation establishing thresholds for the volume of sales or the number of transactions that a business must have in that state over a twelve-month period before sales tax must be collected. Any business with sales below that threshold is exempt.

Most states have set the threshold at $100,000 in sales or 200 transactions, but there is some variation in the requirements among individual states. Kansas is at the extreme end with no minimum threshold, which means that sales tax must be collected by any seller doing business online in that state. At the high end are California, New York and Texas, which have all set the threshold at $500,000 in sales. If you are concerned that your business may approach or exceed the threshold in a particular state, or if you would like more information about these requirements, consider reaching out to a small business or tax attorney who can ensure that your business will remain in compliance.