Just a few weeks ago the U.S. 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.
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 U.S. 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 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 U.S. 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 U.S. 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?
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