Sales Tax Collection for Online Businesses Could Change with South Dakota v. Wayfair, Inc. Decision

By Arleen Bankemper

RULING DECIDED ON JUNE 21 IN FAVOR OF SOUTH DAKOTA. READ MORE

Article below from May 10, 2018

What does the Upcoming Supreme Court decision in South Dakota v. Wayfair, Inc., have to do with me?

Last month, the U.S. Supreme Court heard the case of South Dakota v Wayfair, Inc., which involves the taxation of interstate commerce. South Dakota is looking to have the court change the law and require businesses to collect sales or use taxes in connection with online purchases even if the company has no physical presence in the state. Depending on the outcome of this case, there is a possibility of major changes for companies doing online business.

Background on Sales Tax and the Internet

In 1992, in Quill v. North Dakota, the Supreme Court ruled that states were prevented from collecting sales tax on internet and e-commerce sales unless the seller had a physical presence in that state. In most states, consumers are required to self-assess use tax on out-of-state purchases and remit the tax to their resident state. However, sales and use tax generated by e-commerce is very difficult for states to administer and collect.

It is estimated that by the end of 2018, 91% of all retailers will have an online presence. As e-commerce becomes more common, this is a huge revenue loss for many states who are looking for additional revenue streams.

Arguments in South Dakota v. Wayfair, Inc.

In the 2018 Supreme Court case, South Dakota is making the argument that out of state retailers who have an economic presence within the state should have a requirement to collect tax from purchasers in that state. South Dakota is requesting that either the Supreme Court overturn the 1992 decision of the Quill case or send a directive to Congress to develop a national law that deals with all the problems associated with this interstate commerce issue.

South Dakota is requesting that either the Supreme Court overturn the 1992 decision of the Quill case or send a directive to Congress to develop a national law that deals with all the problems associated with this interstate commerce issue.

If the Supreme Court overturns the decision of the Quill case, there is the concern of the retroactive collection of sales tax. Some argue this would be egregious to small to mid-size business owners, especially since the record keeping and collection could be difficult. As the law stands now, this would require that every small business register in every taxing jurisdiction in which they make sales. And of course, every taxing jurisdiction has different thresholds and different rules regarding the taxability of goods and services. A small to mid-size retailer would incur a significant burden in tracking sales by jurisdiction and dealing with the different rules that come into play.

Possible Outcomes

Business owners would prefer that the Supreme Court not overturn the case and prevent the free-for-all in writing rules that would occur if Quill is overturned. South Dakota’s argument here is that Congress has had 26 years to act and has not done so thus they are asking the Supreme Court to determine and/or rewrite the law.

If Congress were to create a uniform Commerce Clause it would mean that all interstate commerce (without physical presence) would collect and remit sales tax at a uniform rate and states would share in their respective portions. The States would have an additional revenue stream that they are looking for and small to mid-size retailers who want to sell nationwide would not have to figure out a process for sales tax tracking and filing. Unfortunately, this may mean higher costs for the consumers on internet purchases. According to the court case, 19 of the top 20 online retailers (like Amazon) are already collecting and remitting sales tax in all states. This is due to the opening of distribution warehouses in multiple states, therefore creating a physical presence.

How can DHJJ help?

DHJJ will be monitoring this court case and will update you when a final decision is reached. The decision could come as early as June. If your business has questions on state and local taxation, or you would like training for your staff, please contact DHJJ’s State and Local Tax (SALT) group by calling 630-420-1360, or contact us using the form below.