For decades, online retailers and consumers enjoyed one of the greatest perks of online shopping: less sales tax. Of course, "Uncle Sam" always took his share, but state sales taxes were largely ignored. That is, until recently, when states were allowed to charge sales tax based on the "physical presence" rule. If a business conducted online sales to consumers in a state where any part of that business was located (i.e.: warehouses, offices, storefronts), they were required to charge a state sales tax.
South Dakota v Wayfair Inc
This was not good enough for South Dakota, however. The state felt it was losing too much revenue due to the amount of online transactions vs in-person store shopping. In 2016, South Dakota sought to collect sales tax from online retailers whose sales to consumers in their state exceeded $100,000 or 200 separate transactions. Wayfair, Overstock, and Newegg, who conduct the majority of their business online, challenged South Dakota due to the fact they have no physical presence in that state. The challenge went all the way to the U.S. Supreme Court, who decided 5-4 in favor of South Dakota. This ruling sets a precedent for states and localities across the country to charge tax on transactions that were previously exempt.
What Does This Mean for Cannabis?
With the legalization of hemp, online CBD sales have seen an increase in sales to states where retailers don't have a brick-and-mortar store. Now, online hemp and CBD retailers must research which states have enacted sales tax laws based on this decision in order to avoid penalties for not paying.
Localities within states that have passed sales tax laws are now beginning to impose their own similar laws. For example, the city of San Francisco recently passed legislation imposing a business tax on adult-use cannabis businesses who conduct more than $500,000 worth of annual sales. Like South Dakota, the ordinance's scope was broadened to include sales generated within San Francisco by companies not physically located in the city.
With states and localities now able to impose their own sales tax regulations, it's important for cannapreneurs to remain compliant when reporting sales in order to pay the appropriate sales taxes. It's important to remember that the IRS is unforgiving and has sent many a businessperson to jail for tax evasion. Retailers must keep track of sales not only to individual states but to localities within those states. On top of sales tracking and keeping up with tax laws, it's becoming increasingly difficult for cannapreneurs to actually run a business.
Fortunately, there are services out there to help. Businesses such as CohnReznick have tax professionals on staff to help entrepreneurs and business owners, including those in the cannabis industry, navigate the difficult and confusing federal, state, and local tax laws. From their website:
If your business has operations in multiple states, you need to know where you’re subject to taxes and which taxes may be due. Through our nexus reviews, CohnReznick will review your operations, identify jurisdictions where return(s) may be due, and summarize the potential tax liabilities. We also develop strategies to minimize exposures and, if needed, we can assist in securing VDAs to help you manage your overall past tax risk.
Are you worried about whether or not your canna business is tax compliant? Let's discuss it in the comments.