Internet Sales Tax
In South Dakota, v. Wayfair, Inc., the Supreme Court of the United States overruled the physical presence requirement established in Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967).[1] The Wayfair case represents a historic change because it overturns 52 years of precedent; unless the seller maintained a physical presence such as retail outlets, salespeople, or property within the state, the state lacked the power to require the seller to collect a local sale or use tax. This is a paradigm shift in how STA clients do business. Previously, they had to maintain a physical presence in the state before the local authority was able to require out-of-state sellers to collect and remit sales tax. Now, you must pay, collect, and remit sales tax for all sales made online.
In South Dakota v. Wayfair, the Court maintained that the physical presence requirement grants prejudicial advantage to online retailers and deprived states of significant tax revenue.[2] Thus, the physical presence requirement must be removed to make the online marketplace fair. States derive significant revenue by applying a sales tax. In these states, sellers are required to collect and remit the tax; if they do not, then in-state consumers must pay the tax at the same rate. However, consumer compliance with paying this use tax was notoriously low. In 2016 South Dakota confronted this inequity directly by legalizing the collection of sales taxes from certain remote sellers.[3] The South Dakota legislature found that the inability to collect sales tax from remote sellers sacrificed sales tax revenue in favor of online retailers and siphoned vital funds from state and local services.
The Court ruled that the economic and virtual contacts between online sellers and South Dakota were substantial enough that the tax would not violate the Commerce Clause. Therefore, the Court ruled that South Dakota has the authority to tax such out-of-state, online, transactions. Now, businesses must register for licenses to collect and remit sales tax, if they wish to sell online. This will increase compliance costs for online sellers. However,
“South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.”[4]
In the dissenting opinion, Chief Justice Roberts, with whom Justice Sotomayor and Justice Kagan joined, argued that E-commerce dominates such a significant part of the economy because of the physical-presence rule. Altering this rule may threaten the online marketplace and force small internet-retailers out of business. Chief Justice Robert also argued that the Court should not dictate internet taxation policy.[5] More than “10,000 jurisdictions impose sales tax, each with different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence in the jurisdiction.”[6] He concluded that the potential burden of complying with sales taxes of online sales might diminish opportunities for commerce in a free market.
This matters to everyone because now retailers must charge buyers sales tax for all online purchases. If you are a business owner that sells products or services online, the burden has shifted to you to collect and remit sales tax, a burden that did not exist for the past 52 years. While there have been various vitriolic opinions regarding the role of federalism; such as, should the States, Congress, or the Court have the power to dictate economic policy. These arguments are largely academic when the consequences are forced on a business owner. Internet sales taxes threaten your business with increased administrative, compliance, and taxation costs. STA can mitigate the threat of impending sales tax and give you peace of mind.
[1] South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2087–88 (2018). In Quill and National Bellas Hess, the court affirmed that a company whose only connection with the customer in the State is by common carrier of the United States mail lacked the necessary minimum contacts with the State required by both the due Process Clause and the Commerce Clause. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967); Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992).
[2] Specifically, Justice Kennedy wrote, “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.” South Dakota v. Wayfair, Inc., 138 S.Ct. 2080, 2094 (2018).
[3] The Act requires out-of-state sellers that delivered more than $100,000 of good or services annually or engaged in 200 or more separate transactions for the delivery of goods and services in the state, to collect and remit sales tax as if they had a physical presence in South Dakota.
[4] South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2100 (2018).
[5] The dissent included that the Court should leave it to congress to decide whether and to what extent States may tax interstate internet sales. https://supreme.justia.com/cases/federal/us/585/17-494/#tab-opinion-3918489.
[6] South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2103 (2018).
