U.S. Supreme Court Ruling Changes Sales Tax Laws for E-commerce Retailers
As a result of the U.S. Supreme Court 5-4 ruling in the case of South Dakota v. Wayfair, Inc. issued late last Thursday (June 21,2018), states who have not already done so may pass laws requiring all online retailers to collect sales tax and remit it to the state where the customer is resident.
The case challenged the physical presence standard upheld by the Supreme Court in Quill Corp. v. North Dakota (1992). In that case the court held that a state cannot tax a business unless it has a substantial connection (nexus) with the state, defined as a physical presence. In other words, if the business had a store, office or warehouse in that state, they were required to collect sales tax, and if not, they were exempt.
That decision has now been repealed, and this case has been remanded to the South Dakota Supreme Court "for further proceedings not inconsistent with" the Supreme Court opinion.
In the Dakota v. Wayfair, Inc. ruling the majority of justices held that “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, are overruled.” The court found Quill to be flawed saying, “Quill creates rather than resolves market distortions…The Internet's prevalence and power have changed the dynamics of the national economy."
The decision went on to elaborate, that the physical presence rule “is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced. The rule also produces an incentive to avoid physical presence in multiple States, affecting development that might be efficient or desirable.”
Justice Kennedy, writing on behalf of the majority specifically elaborated, that “This Court should no prevent State from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or building in a State.”
This decision is viewed as a victory for state and local governments who felt they have been unfairly deprived of sales tax revenues by e-commerce retailers. It is also viewed as a victory for in-state retailers who felt the out-of-state retailers had an unfair advantage by not having to charge sales tax.
Under a previous ruling, if a business was shipping to a customer where the company didn’t have any physical presence, the business didn’t have to collect sales tax for the purchase. In those cases, customers bore the responsibility for paying ‘use taxes’ in lieu of sales taxes, but many customers were unaware or simply ignored their responsibilities, and states and local governments believed they were losing out on potentially billions in lost tax revenues.
Many states had enacted ‘economic nexus’ to establish thresholds for e-commerce collection of taxes or customer information to remit to the state. It’s still unclear how such thresholds will be applied in light of Thursday’s ruling, but one thing is certain, with the existence of both ‘economic nexus’ legislation and the decision by the Court, almost every state will be seeing significantly higher sales tax revenues to bolster their budgets.
Now, more than ever, e-commerce merchants will be forced to deal with the increasing complexities of sales tax compliance. Not only will their local state be out ‘after their hide’ if they make a mistake, but every state in which they make sales to customers will also be out to enforce sales tax collection and remittance. It is recommended that e-commerce retailers consider working with a tax expert company (an app, like Avalara or others) to help integrate sales and use tax collections and reporting into their overall business framework.
More detailed information can be found at Intuitive Accountant: Supreme Court Decision on Sales Tax for E-commerce