On Friday, January 12, the United States Supreme Court said it will consider whether businesses have to collect sales taxes on online transactions – a case that will affect how consumers are charged for their purchases on major e-commerce sites such as Amazon, Overstock and Wayfair.
The case, South Dakota v. Wayfair, Inc., challenges the Court’s decision in the 1992 decision, Quill Corp. v. North Dakota, in which the court ruled remote sellers would have to collect state sales taxes only if they have a physical presence in the state. Businesses without a physical presence could not be required to collect or remit the tax.
Thanks to the birth of ecommerce, the internet has made it much easier for retailers to reach consumers in all states. Online sales have exploded in recent years, but state and local sales tax revenue has not increased by a corresponding amount due to consumers who purchase online and do not pays sales or use tax. States estimate they’re losing out on at least $13 billion in sales tax revenue annually due to untaxed remote sales. States like South Dakota that do not have income tax and rely heavily on sales tax claim to have been particularly affected by their inability to tax all internet sales.
In 2016, South Dakota created an economic nexus law to challenge the physical presence precedent upheld by Quill. The law requires retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases. Shortly after enacting the law, the state filed a suit asking the courts to declare the measure constitutional. Now, the Court has agreed to hear South Dakota’s challenge to Quill, and a ruling is expected by late June.
What’s next?
It’s unclear for now. If the Court decides in favor of South Dakota, that decision would pave the way for all states to tax remote sales.
“States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike,” South Dakota said in its Supreme Court appeal.
Companies like Wayfair, Overstock and Newegg said the court should reject the appeal and leave it to Congress to set the rules for online taxes. Amazon backs a nationwide ruling that would relieve retailers from dealing with a patchwork of state laws.
We will continue to share updates on the case. Retailers who sell into multiple states, but who don’t currently collect and remit tax wherever they sell, should monitor this case closely.
