Following the South Dakota v. Wayfair decision, business obligations for collecting sales tax are likely to change.
The United States Supreme Court has issued a ruling in South Dakota v. Wayfair, Inc., a case relating to how sales tax is assessed and collected for purchases made online. In a 5-4 decision, the court overturned Quill Corp. v. North Dakota, the 1992 case that practically prohibited states from collecting sales tax from retail purchases made online unless the seller had a physical presence in the state. This made interstate sales effectively tax-free, as few paid the use tax which would be technically required in this case, and enforcement of such laws has historically been rather lax.
The most obvious consequence of this is that it would it would theoretically level the playing field between brick and mortar stores and e-commerce outlets, though the practical effect of that may be overestimated, as Amazon ceded the argument in 2012 and began to voluntarily collect sales taxes in states that levy them. Similarly, more populous states such as California and New York are unlikely to see a substantial added benefit from this, as larger e-commerce operations are likely to have a physical presence in those states. Conversely, smaller states would be more likely to benefit from the increased tax revenues.
That said, this ruling creates a great deal of uncertainty by opening the floodgates and providing no practical guidance for compliance. Chief Justice Roberts noted in his dissent:
The Court, for example, breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. Over 10,000 jurisdictions levy sales taxes, 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.
Because of the nuance—or, depending on your perspective, voluminous exceptions and special cases—present in tax laws across these thousands of jurisdictions, achieving compliance would necessarily require a reliance on software from a third-party vendor for e-commerce operations, which adds an operating expense for these businesses.
For larger operations like Wayfair, as well as Overstock.com and Newegg—which were also targeted by South Dakota as part of their attempt to force the issue through the courts—this cost of compliance is attainable.
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For small businesses, however, this becomes less of a practical solution. Granted, the South Dakota law in question only requires businesses to collect a 4.5% sales tax in the event they have in excess of $100,000 in sales or over 200 transactions in the state. As this is only South Dakota—and municipalities inside South Dakota may well have their own regulations—the task of determining the threshold for collection is not insignificant.
eBay, a popular platform for small and medium businesses, called on Congress to provide clear tax rules "with a strong small business exemption," noting:
The operations of small businesses are different than large retailers, and state tax actions targeting them raise additional legal questions that are not addressed by this decision. The Court was very clear about the importance of protecting small businesses from unfair burdens. If state tax authorities attempt to subject remote small businesses to audits and lawsuits, there will be increased litigation across the country to protect small business from unfair burdens.
Likewise, about half of sales on Amazon—which did not issue a statement on the ruling—are from third-party sellers who use the website as a sales platform, according to a report in The New York Times. That report indicates that Washington state and Pennsylvania have enacted laws in the last year requiring platforms such as Amazon and eBay to collect sales taxes for third-party sales, a move the Times indicates is likely to be copied by other states in the near future.
Building a slide deck, pitch, or presentation? Here are the big takeaways:
- The Supreme Court overturned a 1992 case that practically prohibited states from collecting sales tax from retail purchases made online unless the seller had a physical presence in the state.
- Washington state and Pennsylvania have enacted laws in the last year requiring platforms such as Amazon and eBay to collect sales taxes for third-party sales.
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