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States pass new online sales tax laws, will they survive?

Taxation of online transactions is notoriously difficult. What does it take for a state to claim enough interaction to require a tax obligation? This question has led to many legal battles, the most recent of which made it to the highest court in the country.

The case, South Dakota v. Wayfair, Inc., essentially involved an attempt by a state to tax a business that did not meet the then accepted requirements for taxation. At the time, the government required states to establish a business satisfied a physical presence nexus to require a tax obligation. This basically meant the business must have a headquarters or physical store located in the state. South Dakota passed a law that bypassed this requirement. Instead of requiring a physical presence, the new law required a certain amount of transactions or business conducted within the state to result in required application of a state sales tax. Wayfair challenged the law, pointing to previous precedent to thwart South Dakota’s attempted tax bill.

Ultimately, SCOTUS held in favor of South Dakota. The court stated the requirements were reasonable. These requirements included a $100,000/200 transaction threshold. If this threshold was met or surpassed, a state sales tax was required. As a result, other states throughout the country have passed similar laws. Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, North Dakota, Washington and Wisconsin passed a similar threshold requirement on October 1, 2018.

Whether or not these new attempts will withstand a legal challenge is not yet known. One potential issue involves the fact that South Dakota conducted much less business compared to these other states. As such, it could be argued that these states should have higher thresholds.

Regardless, the new laws are a tangible example of the evolving nature of tax law. Any business is wise to review their tax planning strategy and better ensure they are meeting their tax obligations. The attorneys at Goldburd McCone LLP can help.

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