Supreme Court Rules to Close Online Sales Tax Loophole
On June 21, 2018, the U.S. Supreme Court ruled that states can impose sales tax on internet retailers, even if the retailer has no physical presence in that state.
Background of the Decision
The court’s decision in South Dakota v. Wayfair overturns a 1992 Supreme Court precedent set by Quill Corp. v. North Dakota, which only allowed states to compel online retailers to collect sales tax if they maintained a physical presence in the state. Justice Anthony Kennedy, in his majority opinion, reasoned that modern e-commerce no longer aligns with the requirements of the overturned decision.
“Nexus” is the concept that determines if a corporation has sufficient presence in a state. If a corporation is determined to “have nexus” in a particular state, they are required to pay state taxes there; if they are determined to “not have nexus,” they are not obligated to pay the state taxes. Previously, nexus was bounded by the Quill decision, which defined the concept by physical presence. However, the South Dakota v. Wayfair decision has, in effect, expanded the concept of nexus by adding a sales threshold to the definition. Even without a physical presence in a state, companies can now be determined to have nexus.
Though the Wayfair decision was a 5-4 split, the Supreme Court Justices did all agree that the Quill decision was wrong. The four dissenting Justices on the Wayfair case simply thought that Congress should address the problem rather than the courts. And while the Supreme Court did decide that South Dakota’s particular tax law did not unduly burden interstate commerce, their decision indicated that more complex or further reaching state tax laws might.
Impact of the Decision
So what does this mean for online retailers? As a result of the Wayfair decision, any company that exceeds the sales threshold in a state—regardless of physical presence—now has nexus. Therefore, the company owes sales tax and must file state returns.
E-commerce entities will need to take the following steps: (1) re-determine where they have nexus, (2) begin to collect sales tax information in those states, and (3) file the subsequent state returns.
Responses to the Decision
While e-commerce giants, such as Amazon and Wayfair, saw their stocks tumble in the wake of the Supreme Court decision, both brick-and-mortar businesses and many states consider the outcome a victory. Offline retailers have long decried their disadvantage at having to charge sales taxes when their online competitors often did not have to do so. Meanwhile, many states—particularly those that lack their own laws taxing internet sales—have complained about missing out on billions of dollars in annual revenue as a result of the online sales tax loophole.
In response to the Wayfair decision, many states will likely be looking to update existing or enact new e-commerce tax laws to include a sales threshold. Congress, too, is expected to address the issue, as attention turns back to a number of stalled e-commerce bills, including the Remote Transactions Parity Act/Marketplace Fairness Act and a sales tax proposal from Rep. Bob Goodlatte (R-VA). New legislation will likely include provisions to simplify, at least for online retailers, the complex state and local tax landscape.
Mixed opinions exist as to the impact of the Wayfair decision. Supporters laud it as a strike back against powerful online retailers. While the Quill decision was instrumental in the establishment of e-commerce, today’s environment is much different, and internet retailers no longer suffer the same disadvantage that they did in 1992. However, most large online retailers already collect sales taxes, as they have a large physical presence in most, if not all, states. Therefore, opponents of the decision argue that it will impact small retailers much more than big ones.