Have you ever gone to buy an item, maybe a dress or shoes online and noticed there is no sales tax listed for the item? Do you think this is a great deal and make the purchase because it is cheaper than buying the item in a physical store where there is sales tax?
Did you know that depending on where you are in the US, you might have had the burden of figuring out the sales tax and paying it anyway? No? Well, you are not alone. But, that all changed on Thursday when the Supreme Court handed down its ruling in Wayfair v. South Dakota.
Sales tax has been around for years. But, the issue of sales tax for online purchases is relatively new. As is often the case, the law has not caught up with technology.
Appropriately, on Tax Day, April 17, the US Supreme Court heard oral arguments in South Dakota v. Wayfair, to consider whether states can collect sales tax for online purchases regardless of whether the retailer has a physical presence in the state. On June 21, the Court overturned decades of precedence and held 5-4 that states can tax online retailers, regardless of whether they have a physical presence in the state.
In 1967, the Court held in National Bellas Hess Inc v. Dept of Revenue Illinois, that based on Commerce Clause protections, Illinois could not require an out-of-state business to collect its sales tax unless the business had a physical presence in Illinois. In 1992, in Quill Corp. v. North Dakota, the Court reaffirmed the need for a physical nexus for a state to have the power to tax. The Quill case involved purchases from mail order catalogues.
Much has changed technologically in the past 26 years. Since 1992, internet sales have grown exponentially. Purchases are not made from catalogues – they are made from websites. In 1992, there were maybe 10 websites total. Today, there are over a billion sites from which buyers can purchase everything from apples to zinfandel, and everything in between. Assuming these online sales are in lieu of sales at brick and mortar locations, the states are losing out on the revenue from sales tax. The Government Accountability Agency (GAO), estimates that between $8 billion to $13 billion nationwide went uncollected in 2017 for online purchases. These revenues could be used for police, health care, education and infrastructure in the localities.
In the absence of federal laws to allow sales tax on internet sales, states have established laws to reach these transactions by either stretching the definition of physical presence or using economic nexus as a justification for taxation. Over two dozen states have acted. The result has been a myriad of tax laws among the states covering an estimated12,000 sales tax jurisdictions in the US.
In the 2015 case, Direct Marketing Association v. Brohl, Justice Kennedy recognized the need for a fresh look at the online sales taxation issue and urged a new case. The Court got one this year with South Dakota v Wayfair. At issue was whether South Dakota could tax a retailer that conducts at least 200 transactions a year or has at least $100,000 in annual sales, regardless of a physical presence in the state.
In writing for the majority in Wayfair, Justice Kennedy overturned the physical presence requirement for taxation. States will now have the power to craft their own individual sales tax requirements. Some may choose to allow dollar thresholds or a minimum number of transactions in a state in order to trigger the tax. Even after this ruling, there will still remain a patchwork of tax rules among the hundreds of taxing jurisdictions in the US including states, cities and municipalities.
In his dissent, Chief Justice Roberts saw no crisis and no need for the Court to act when Congress has the authority to act. However, Congress has lacked the will to act. Several bills have been introduced over the past decade but to no avail. Policy, politics and palace intrigue have hampered any meaningful and substantive Congressional action.
The Administration weighed in on the side of the states in the Wayfair case. However, as the Wall Street Journal has previously reported, there is a difference between the Trump Administration policy, and the TrumpStore.com practice. While the Administration supported states’ right to collect sales tax for online purchases, TrumpStore.com failed to collect sales tax in more than 40 states, including New York.
So what does this ruling meaning for those in the fashion world? For retailers, there was division. Some large retailers who operated in many states, argued that there needs to be a level playing field between online and brick and mortar stores for taxation. However, others, such as Etsy and eBay, argued that they are but the conduits or platforms for retailers to sell and therefore should not have to be taxed. Amazon has collected sales tax for its own items it sells, but has not for third party vendors. Now, it will most likely have to collect for those purchases too.
If it will no longer be cheaper to purchase an item online, will consumers go back to the malls? Or, is the ability sip and click in the privacy of one’s home so ingrained in consumers’ mentality that they would still rather forgo the mall? What will international companies do now that a physical presence is no longer required in order to be subject to a tax? If online purchases are now subject to a tax, what about other online activities such as downloads, or even just internet access? These and other questions will play out over the next few months as many states rush to implement tax laws before the holiday shopping season. But, will the answers come from actions in the state houses, the malls, or your own house? If customers can’t find it, it doesn’t exist. Clearly list and describe the services you offer. Also, be sure to showcase a premium service.
While states are working to implement at tax regime, Congress has responded to this ruling by introducing several bills. One such measure is the Online Sales Simplicity and Small Business Relief Act of 2019:
This bill prohibits states from imposing a sales tax collection duty on certain remote sellers. A "remote seller" is a person without a physical presence in a state who makes a sale in the state. A state may impose a sales tax collection duty on a remote seller only for a sale that occurs after January 1, 2019.If customers can’t find it, it doesn’t exist. Clearly list and describe the services you offer. Also, be sure to showcase a premium service.