A Post South Dakota v. Wayfair Guide for Online Retailers

The South Dakota v. Wayfair (2018) Supreme Court ruling reshaped sales tax laws in the U.S. by allowing states to require out-of-state businesses to collect and remit sales tax, even without a physical presence. This decision introduced economic nexus, meaning businesses that exceed a state’s sales or transaction threshold must comply with its tax laws. This guide will help you understand how the ruling impacts online sellers, marketplace facilitators, and multi-state businesses, ensuring you stay compliant with evolving tax regulations.

Why the South Dakota v. Wayfair Ruling Matters

The 2018 South Dakota v. Wayfair decision transformed how states approach sales tax collection, particularly for businesses engaging in remote sales. Before this ruling, the Quill precedent required businesses to have a physical presence in a state to establish nexus and collect sales tax. This meant that sellers without offices, warehouses, or employees in a state were exempt from tax obligations.

The Supreme Court’s decision in South Dakota v. Wayfair overturned the Quill precedent, allowing states to enforce economic nexus laws. These laws require businesses to collect sales tax based on revenue or transaction volume thresholds. For example, South Dakota set its threshold at $100,000 in sales or 200 transactions annually.

States quickly adopted similar thresholds, creating a new standard for sales tax compliance. This decision created both opportunities and challenges for businesses. On one hand, it leveled the playing field between local and remote sellers. On the other, it increased the compliance burden for businesses selling across multiple states.

Identify States Where You Have Sales Tax Obligations

To avoid overpaying sales tax, businesses must identify exactly where they are obligated to collect and remit taxes. Determining nexus is the first step toward achieving accurate sales tax compliance. Nexus can occur in two primary forms:

Physical Presence: If your business operates warehouses, maintains inventory, or has remote employees in a state, you have physical nexus. Traditional sales tax laws still require businesses with a physical presence to register, collect, and remit sales tax.

Economic Nexus: Post-South Dakota v. Wayfair, businesses must comply with state sales tax collection laws if they exceed economic thresholds—such as $100,000 in annual sales or 200 transactions. These thresholds ensure that businesses conducting commerce in a state contribute to its tax base.

According to the Congressional Research Service, businesses failing to track economic nexus can incur significant penalties for non-compliance. However, tracking nexus manually is time-consuming, particularly for growing businesses operating in multiple states.

Classify Your Products and Services Properly

Accurately classifying products and services is essential to prevent sales tax overpayment. Under state sales tax laws, goods and services are taxed differently depending on their classification. Misclassifications often result in businesses collecting or remitting more tax than required.

Tangible Personal Property: Items like electronics, furniture, and clothing are generally taxable. However, many states exempt certain essentials from taxation, such as groceries, medical devices, or agricultural supplies.

Digital Products: Digital downloads, streaming services, and cloud-based software (SaaS) are subject to sales tax collection in some states. Others exempt these products entirely or apply tax only under specific conditions.

Services: States like South Dakota and Hawaii tax particular services, such as software support, consulting, or maintenance plans. While many states exempt services, exceptions are common.

The CPA Journal highlights the importance of understanding state-specific rules for product taxability. Missteps during audits often lead to overpayments or compliance errors.

Leverage Exemptions and Reduce Overpayments

Exemptions significantly reduce overpaid sales tax, yet many businesses fail to manage them effectively. Certain buyers—such as resellers, non-profits, or government organizations—are often exempt from sales tax collection, provided they submit valid exemption certificates.

To optimize exemptions and avoid unnecessary taxation:

Identify Eligible Sales: Review state guidelines to determine which transactions qualify for exemptions. Reseller certificates and tax-exempt organization documentation must be collected and validated to confirm eligibility.

Validate Certificates: It is crucial to ensure that certificates are accurate and up to date. Invalid certificates can trigger compliance issues during state audits.

Automate Exemption Management: Sales tax automation tools streamline exemption tracking and validation, automatically applying for exemptions for eligible buyers.

According to the Congressional Research Service, exemptions became even more critical following the South Dakota v. Wayfair decision, as states increasingly scrutinize compliance for remote sales. Failure to manage exemptions properly often results in businesses overcharging customers or remitting unnecessary taxes.

Automating exemption processes ensures businesses collect and remit tax only when required. By maintaining accurate records, businesses can prevent overpayments while reducing audit risks and maintaining customer trust.

Keep Up with Changing Sales Tax Rates

State and local sales tax laws change regularly as jurisdictions adjust tax rates or expand taxable categories. Without up-to-date rate information, businesses risk errors in sales tax collection, leading to overpayments or compliance issues.

Manually tracking rate changes across multiple jurisdictions is impractical, especially for businesses managing commerce across states. For example, certain states may introduce new rates for specific products, such as tangible personal property, while exempting others.

The Tax Foundation emphasizes that accurate tax rate application is critical in the post-Wayfair landscape, where businesses must monitor both physical and economic nexus. By staying current, businesses reduce administrative work and ensure every transaction aligns with state requirements.

Avoid Overpaying Sales Tax — Automate with Kintsugi

The South Dakota v. Wayfair decision redefined sales tax laws and increased compliance obligations for businesses engaging in remote sales. To avoid overpayments, businesses must monitor nexus, classify products accurately, manage exemptions effectively, and stay updated on rate changes.

Automation tools like Kintsugi provide businesses with the solutions to manage sales tax collection efficiently. Businesses can eliminate overpayments, reduce errors, and ensure they meet every jurisdiction’s requirements by automating compliance processes.

Start simplifying your sales tax compliance today by booking a demo or signing up with Kintsugi.