To Tax or Not to Tax Interstate Retailers? That Is the Question.
Note: Originally posted on January 19, 2018. Updated March 8 to reflect latest information.
Twenty-six years ago, the U.S. Supreme Court set a precedent when they decided a remote retailer cannot be obligated to collect sales tax in states where the company does not have a physical presence. Now, that decision is being challenged.
Historically, online retailers have relied on the 1992 court case to determine whether they were required to collect state sales tax. However, in 2016, South Dakota passed a law requiring retailers making more than $100,000 in annual sales to South Dakota customers to collect and remit a 4.5% sales tax, regardless of whether the retailer has a physical presence in the state. Online retailers Wayfair, Overstock and Newegg have since challenged the law.
The U.S. Supreme Court will hear oral arguments in South Dakota v. Wayfair on April 17, 2018. The case could ultimately determine if states can require remote sellers to collect and remit sales/use taxes on transactions.
The current rule
In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that an out-of-state mail-order company that sells goods to North Dakota customers—without a store outlet, sales representative, or other significant property in the state—cannot be required to collect North Dakota use tax. The Court explained that this collection requirement on a company lacking physical presence in the state violated the Commerce Clause of the U.S. Constitution. As a result, determining whether a seller is required to collect sales/use tax in a state has since been based on whether the seller has a physical presence there.
Considerations for changing the rule
Many have believed for a while that the Quill decision needs to be revisited or overturned because the physical presence test is antiquated. According to the Government Accountability Office, states are estimated to have missed out on up to $13 billion in revenue in 2017 alone, and some say the ruling negatively impacts brick-and-mortar retailers. At the same time, requiring smaller internet retailers to comply with each state’s varied tax laws creates an administrative burden on them.
We will keep you updated on the latest developments in this and other state and local tax issues. Please contact us if you have any questions in the meantime.