Avoiding Personal Liability in E-Commerce after Wayfair
The internet has had a profound effect on consumer habits, especially with regard to online shopping. For business owners, there are innumerable benefits to opening an online shop as opposed to operating solely a traditional brick-and-mortar storefront. However, one of the most significant drawbacks of opening an e-commerce store when compared to a traditional brick-and-mortar storefront is the complexity and uncertainty of sales tax law.
On June 21, 2018, in South Dakota v. Wayfair, the Supreme Court of the United States addressed the uncertainty relating to whether or not a business must have a physical presence in a state before that state can require the collection of sales taxes. The Supreme Court ruled that states may require businesses with no physical presence within that state to collect and remit sales tax. In response to this case, the goal for any e-commerce business should be to ensure compliance with the sales tax laws of all states as soon as possible for two reasons. First, many states already have legislation in effect mandating sales tax collection for internet sales. Second, the penalties for non-compliance can be significant and, as in Indiana, can include personal liability of the company’s owners or members for amounts not paid, regardless of any corporate structure intended to shield owners from personal liability.
The Wayfair decision will not affect all e-commerce businesses equally. Many states have enacted legislation in response to Wayfair that exempts smaller businesses from tax collection obligations. Some states have special laws that apply to what is now commonly referred to as a “marketplace seller.” A marketplace seller is a seller that, instead of launching an independent website, opens a seller account on websites such as Amazon, eBay, or Etsy as a third-party seller. For example, a consumer may buy a product from Amazon’s website, but is actually buying the product from “XYZ Third-Party Seller” with Amazon merely facilitating the sale.
States have taken drastically different approaches to sales tax collection from marketplace sellers. A few states place the responsibility on the marketplace facilitators, such as Amazon, to collect sales tax on behalf of the marketplace sellers. Some states treat marketplace sellers exactly the same as traditional e-commerce sellers. Other states require marketplace sellers to collect sales tax for merely storing inventory within a state. Such laws clearly target a subgroup of Amazon sellers referred to as Fulfillment by Amazon, or, FBA sellers. These sellers use a special service provided by Amazon, sending inventory to various Amazon warehouses where it is stored until purchased, with Amazon handling the shipping. For FBA sellers, it is especially important to ensure compliance with these new sales tax laws because such sellers have no control over where their products are sold and very limited control as to where their products are stored, potentially leading to significant unintended sales tax liabilities.
While many states have set forth legislation for sales tax on internet sales, many other states have yet to enact legislation or are still modifying existing legislation to comply with Wayfair. Therefore, it is important for e-commerce companies to not only be aware of existing laws, but also have a system in place to monitor for changes in states’ laws.
Responding to new legislation
In the aftermath of Wayfair, it is imperative that e-commerce businesses take the initiative to become fully compliant with the sales tax laws of all jurisdictions. Engaging legal counsel is key to this process. Additionally, legal counsel can help reduce any resources that may be wasted by collecting sales tax in a jurisdiction where it is not required. If you have any questions regarding your company’s sales tax obligations, please contact one of Barrett McNagny’s business or tax law attorneys.