I recently had the opportunity to interview Scott Peterson, Avalara’s Vice President of U.S. Tax Policy and Government Relations, about a landmark decision that has come down from the Supreme Court, South Dakota v. Wayfair, and the big implications for small and medium businesses.
Prior to Avalara, Scott was the first executive director of Streamlined Sales Tax Governing Board. He also spent 10 years as the director of the South Dakota Sales Tax Division and 12 years providing research and legal writing for the South Dakota legislature.
You can listen to the interview on the Sage Advice podcast here or read an edited version of the interview below.
Tell us a little bit more about yourself and what you do.
This is my fourth professional job. They all had something to do with tax. Practically, they’ve all had something to do with state and local tax. I’ve never done anything with federal taxes.
I got here by accident. I showed up on the first day of my first job and the guys asked my coworkers who had been there for a while if they wanted to change their specialties, and they all said no. He turned around and looked at me and said, well, you’re our tax guy!
I never spent a second of my education studying tax, so I knew nothing about tax. I had to learn it all the hard way.
It is the lifeblood of state government. There’s not a single thing that any state or government of any nature can do without revenue. And it occurred to me right off the bat that if you specialize in the lifeblood of an organization, you are always going to have something to do!
We want to talk to you about a landmark decision that has come down from the Supreme Court and that is South Dakota v. Wayfair.
The States have been trying to get a decision like South Dakota v. Wayfair for nearly 100 years. And the challenge has always been that the United States Constitution, which in this case is a really, really good thing, says that state taxes can’t burden interstate commerce. And historically the Supreme Court has ruled that some things, the way the states enact or enforced their taxes, are a burden on people who are engaged in interstate commerce. And while that’s all a good thing, the states have never been particularly happy. And for the longest time, the test to determine whether or not a state can enforce its sales tax on you is whether or not you were physically present inside that state.
For example, Kansas cannot give you a speeding ticket unless you are in Kansas breaking their speeding law. They can’t say, “oh, you live in New Jersey and I’m going to give you a speeding ticket for Kansas even though you’d never been in Kansas and never broke the law in Kansas.” So being physically present is kind of a natural thing with state laws, but like Kansas can’t give a New Jersey resident of speeding ticket when they’re in New Jersey. That New Jersey person didn’t break in Kansas laws. They’re not doing anything in Kansas.
With retailing, it’s different. You can be inside of a state. You can be engaged in business inside of a state and not be physically present inside that state, and that’s the big difference between sales tax laws and normal laws that states enforce on people. You can’t be guilty of breaking speeding laws in Kansas unless you’re physically in Kansas breaking the speed laws. Well, you can sell all kinds of things in Kansas and never be physically present inside of Kansas. And that’s always been something that in-state retailers have always been offended by, that you could do this and not be subject to the same laws as they were and the states have always been offended by that because there’s really no way of getting that sales tax collected unless the retailers doing the collection.
This is a big deal for small retailers because they have had 50 plus years of one law and the law was you had to be physically present before they could force you to collect.
And now we’ve got that entire law in theory, completely turned on its head and with what the states are doing today in which is the law that South Dakota enacted was we can make you collect our sales tax even though you’re not physically located in the state once you exceed a certain level of sales inside the state.
And so for a lot of businesses, the big deal is this is just different than the world I grew up in. I mean, it’s completely different than the world I grew up in, they grew up frankly building their business model around the fact that they were not going to have to collect that state sales tax because they never opened the store there. They never send employees there.
So the big deal is just initially, wow, this is not what I expected my life to be. I now am a tax collector everywhere.
What are the key implications for small and medium businesses based on South Dakota v. Wayfair?
- If you are a business that is selling stuff outside of your state, you should look at your sales by state.
- If your sales are over $100,000 or 200 or more transactions in any of those states outside of the state that you currently reside in, you need to look at something that you may or may not be subject to tax, but that’s like the absolute minimum threshold, $100,000 roughly and 200 transactions.
- It still might not mean that you have to pay sales tax because the stuff might not be taxable, but that would be if I were owning a business, that would be the first two things that I would look at.
And then there are another 37 steps, of course, depending upon if you’re subject to the tax.
- You don’t have to do anything after that first step unless you have met those states thresholds.
- If you’re making $35,000 a year worth of sales in South Dakota, that law doesn’t apply to you and you don’t have to do anything.
- But if you’re doing $100,000 in Wyoming, that law’s going to apply to you and you need to then do the next thing to collect sales tax in Wyoming.