By Nathan Vinson, Partner
English, Lucas, Priest and Owsley, LLP
If you aren’t paying Kentucky sales tax on items you buy online, you will be soon – and you have the great state of South Dakota to thank for it.
Earlier this year, the U.S. Supreme Court ruled on a case that set precedent for any state to collect sales tax on items sold by remote retailers, which are retailers that have no physical presence in the state. The case was South Dakota vs. Wayfair Inc. In June, the U.S. Supreme Court ruled that South Dakota, along with any other state, can collect sales tax from remote retailers.
It is up to the retailer to collect the tax and send it to the state. Kentucky has allowed some leeway for retailers to get processes in place to collect the tax and begin paying, but not a lot. Remote retailers are expected to be in compliance and collecting taxes by October.
A little history
This isn’t the first time the U.S. Supreme Court has ruled on remote retailers. In 1992, SCOTUS ruled on Quill Corp. v. North Dakota. As a result of the holding in that case, retailers without a physical presence in the state were not required to collect and remit sales tax to the state. That is why, for example, sometimes Amazon collects sales tax and sometimes not. To further the example, if Amazon has a distribution center within the state you live, it will be required to collect sales tax on your purchase. Otherwise, the online retailer is not required to collect and remit sales tax on sales to customers outside of the retailer’s state of physical presence. For smaller online retailers, the rule was a gift from the gods (well, actually just the U.S. Supreme Court).
Meanwhile, online sales have skyrocketed, and there is a lot of money being left on the table. A Forbes story that appeared online around the time of the SCOTUS decision in June says states could be leaving as much as $30 billion in revenue on the table, collectively, by not charging state sales tax on items purchased through remote retailers. Wayfair has ended that era. If you are on the edge of your seat for more in-depth treatment of the seminal cases, Forbes has a good piece available here.
One bit of good news for remote retailers: Kentucky is a part of a system called Streamlined Sales Tax Registration System (SSTRS) that will allow retailers to register with 24 states at once. You can find information on that here. The entirety of the states currently participating in SSTRS are: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. Tennessee is voluntary (naturally).
The Kentucky Department of Revenue’s Tax Answers web site says that neither Kentucky nor the Streamlined Sales Tax Governing Board, Inc. (the entity that oversees and governs SSTRS) charge a registration fee. They warn retailers: “Please beware of fraudulent website offers to register retailers in all sales tax states for a single registration fee.”
Kentucky’s registration doesn’t expire, and no annual fee is charged to retailers. Kentucky also gives retailers some compensation for setting up sales tax collection through SSTRS: “Subject to a $50 limitation per reporting period, a retailer may deduct and retain 1.75% of the first $1,000 of tax due and 1.5% of the tax due exceeding $1,000. The compensation is also limited to timely filed and paid returns.”
There’s lots more on the Tax Answers web site, which you can find here.
Forbes accurately points out that SCOTUS hasn’t answered every question. The biggest issue is still on the table, namely, should the taxes be collected based on the seller’s location or the buyer’s location? What if the buyer’s physical address is different than the shipping address, i.e. a gift purchase, or you live in Kentucky but work in Tennessee, and have it shipped to work?
What about small firms? Kentucky addresses this by saying the new remote sales tax law applies to all remote retailers with 200 or more sales or $100,000 or more in gross receipts from sales into the state.
It will be interesting to see how much this changes before the holiday online shipping bonanza begins, and fascinating to watch next Spring to see how much sales tax collections will add to Kentucky’s bottom line.
If your business needs assistance on a tax issue, please contact a qualified professional to help you. You can reach me, attorney Nathan Vinson, at (270) 781-6500 or firstname.lastname@example.org.