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South Dakota v. Wayfair Threatens Ohio On-Line Guitar Purchase!

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OMG! : ( )

The Wayfair decision's implications are SO HUGE and HORRIBLY COMPLICATED that multistate taxpayers should PANIC IMMEDIATELY and start throwing money at state and local tax consultants, especially the one who's been eyeing a new guitar (a PRS S2 Singlecut in Whale Blue), before his favorite online retailer starts collecting sales tax, which would jack up the price by 7.5% and make it even harder to justify the purchase to his wife. (Not that the consultant would ever fail to self-report use tax when required ... cough.)

According to my favorite online guitar retailer's website, they haven’t been collecting Ohio sales tax. Because of this Wayfair decision, they might have to if their annual sales to Ohio are significant enough that they have “availed themselves of the substantial privilege of carrying on business” in Ohio. That meaningless phrase is Supreme Court speak for "trying to make money" in Ohio.

This “trying to make money” standard is the new measure for determining when a state can force a remote seller to collect the state’s sales tax. It used to be that a state could require a remote seller to collect only if the seller had a “physical presence” in the state, which usually meant the seller had employees or property there. Now, “physical presence” is just a term I use when the cat throws up. “HONEY! The cat left a physical presence in the living room again!”

In the Wayfair case, the U.S. Supreme Court held the "trying to make money" standard was met when Wayfair and the other on-line retailers exceeded South Dakota's sales thresholds. South Dakota requires sellers to register and collect if the seller has $100,000 annual in-state sales or 200 in-state transactions. These thresholds, the Court held, were sufficient to ensure the “trying to make money” standard is met. About 25 other states have enacted laws similar to South Dakota's.

As Wayfair made its way through the judicial system, Ohio enacted economic threshold's for on-line retailers. Ohio didn't complete abandon physical presence, however. For those of you who want easy-to-understand guidance on when to register to collect Ohio sales taxes, here's my summary:

If the following is true, then you should probably register and collect:

You are trying to make money anywhere or specifically in Ohio and one of the following is true:

  • You have employees or property based in Ohio or you regularly send employees to Ohio,
  • Your sales into Ohio are facilitated by someone located in Ohio (accepting returns, installation, repairs, advertising, warehousing, etc.)
  • Your sales into Ohio are via the internet and amount to $500,000 or more annually,
  • Your sales into Ohio via a click-through add on an Ohio business's website amount to $10,000 or more annually.

If you want them, the gritty details appear in R.C. 5741.01(H) and (I) and in two Information Releases (ST 2001-01, updated Oct 2017, and ST 2017-02). These describe in painful detail when the Tax Commissioner will argue registration is required. They also provide safe harbors. The Information Releases were issued before the Wayfair decision.

Hopefully, my dilemma has given you an idea of the real and practical impact South Dakota v. Wayfair is going to have. As more states enact laws like South Dakota's, on-line retailers will have increased compliance issues and responsibilities, and guitar-buying consumers can expect higher online prices. : (

About the Author: Steve’s Ohio tax experience began in 2006 at the Ohio General Assembly where he drafted the State’s tax legislation. Steve quickly became a expert on Ohio’s manufacturing, restaurant, oil and gas, R&D, and other sales tax exemptions and on the taxability of data processing, cloud computing, employment, and other services. In 2011, Steve joined Big 4 firm pwc and gained experience on a national level. Steve also worked for a global software development company where he was responsible for sales, use & other tax compliance.
Comments or questions may be submitted to this sales tax specialist by using the on-page "Comment" feature which follows a post, subject to disclaimer on page. You may also send a question or request directly to Steve by using the orange REQUEST link on his Firm Profile page.

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