In 1992, the Supreme Court decided to uphold Quill v. North Dakota1 stating that a mail-order retailer did not have to collect a state's sales tax if they had no physical presence (or nexus) in that state.
Throughout the last two decades, the Quill decision has remained in place, including through the tech boom that eventually gave way to the multi-conglomerate retail revolution that is online shopping today. However, given the massive growth of online retailing and e-commerce platforms, it remains unclear how online retailers were able to avoid the same tax burden that their brick-and-mortar counterparts endured.
The Court finally agreed. With their decision in South Dakota v. Wayfair Inc.2, the Justices handed down a landmark decision on June 21, ruling that states can now require remote retailers to collect and remit sales tax even if they have no nexus in the state.
While the reversal of Quill is undeniably one of the most important state and local tax events in decades, it does not come without a fair amount of grey area. The Court did not offer guidelines regarding South Dakota's economic nexus standard, nor did it indicate if states can seek sales tax retroactively (South Dakota's law does not).
Presently, there is no set standard for how states should go about taxing online sales, leaving more than 10,000 different state and local taxing districts to decide for themselves. Also, the ruling has the potential to present a difficult compliance challenge for many internet start-ups, even though some say there are software solutions to help small businesses navigate local tax laws.
- Will states be allowed to collect taxes retroactively?
- If there are varying tax policies across states, how will they be enforced?
- When will states actually start collecting taxes for online sales? Immediately? 30 days?
- Is South Dakota the model upon which all states should base their new laws upon?
Most experts do think that South Dakota's current law could become the guiding light for other states. It establishes two clear-cut criteria for collecting sales tax from online retailers:
- the remote seller's annual gross revenue exceeds $100,000, or
- the remote seller has 200 or more separate transactions. The Court even commented on how South Dakota's law minimizes the burden on interstate commerce.
Congress will need to provide additional clarity. They have proposed bills, such as the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), which would have let states collect from remote sellers if they agreed to simplify their sales taxes. But Congress has yet to enact legislation regarding this matter, nor have they issued protections to ensure the integrity of the e-commerce sector. The recent Wayfair decision was a close 5-4 vote that may provide the impetus for renewed focus and action.
What to Watch Out For
There are over 30 states that currently have internet sales tax laws, several of which replicate South Dakota, and many others are expected to follow. Remaining states will have to adapt their current laws to conform to the Wayfair decision, which is sure to generate a flurry of activity in legislatures.
With all the questions still looming over the Supreme Court's decision, it has become even more important for businesses to remain vigilant about how this massive change could impact operations. Here are some key considerations to carefully evaluate:
- Preparing for a potential surge in registration and tax reporting responsibilities
- Flexibility in monitoring tax liability for additional jurisdictions
- Adapting to new requirements for revenue sourcing, invoicing and appropriate line item billing to support all applicable jurisdictions
- Keeping up with ever-changing state and local sales and use tax rates
- Complying with tax filing responsibilities for a potentially large population of jurisdictions
- Complying with record retention requirements for online activities that support transaction detail during an audit and for other reporting purposes
1. Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
2. South Dakota v. Wayfair, Inc., U.S. S. Ct. Dkt No. 17–494, 6/21/2018
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