Sixteen years after the then Supreme Court ruled (Quill v. N. Dakota – 1992) that states could not compel retailers to collect sales taxes on sales made to residents unless those retailers had a physical presence in the taxing state, the current Supreme Court reversed that decision. On June 21, 2018, in South Dakota vs Wayfair, Overstock.com, and NewEgg, the High Court ruled that states could charge tax on purchases from out of state sellers, regardless of whether the retailer had a physical presence in that state or not.
While this about-face may sound capricious, even bizarre, consider this: the Quill ruling came at a time when internet commerce was in its infancy. The ruling had a very little impact on states’ overall revenue picture. But as technology improved and e-Commerce sales grew exponentially, the game changed. In 2017 alone, the Government Accounting Office estimated internet sales had cost states $33 billion in lost tax revenue.
What the High Court Said
Writing for the Court, Justice Anthony Kennedy noted: “The internet’s prevalence and power have changed the dynamics of the national economy.” He added that when the 1992 decision was handed down, only about 2% of the nation’s consumers had access to the internet. Today, that number is 89% and growing. As such, and in response to a bevy of “kill Quill” laws passed by several states, the Supreme Court agreed to hear the South Dakota case, and in the end, agreed with the state’s position. And, the decision was not straight along “party” lines. Joining conservatives Thomas, Alito and Gorsuch and swing vote Anthony Kennedy was ultra-liberal Ruth Bader Ginsburg. Therefore, there would be no “we” vs “they” argument in the Congress to encourage the passage of legislation to counteract the decision. Clearly, the die has been cast, and it’s the burden of the online retailer to conform to the new standard. If only there was one…
The New Standard – What is it?
Here’s where it gets really complicated. There is no one standard, no one single procedure. States are free to charge their own sales tax rates. In California, the state sales tax is 7.75%. In New York, it’s 4%, but when you add in various local taxes, it’s 8.875%, unless it’s clothing priced at $110.00. Given the case, it’s exempt from the 4% state sales tax, but not local sales taxes. Clear as mud. In Illinois, medications are not taxable, and several states have exemptions for senior citizens. In simple terms, it’s damn complicated. And there is nothing to prevent states from modifying their tax rates whenever they see fit. And what about all those local taxes? Where do they fit in, if at all? Cities, townships, counties; they all lose sales tax revenue from online sales. Will the state sales taxes suffice, or will there be further litigation, or will the states somehow grandfather them into the revenue picture? Only time will tell.
For the online retailer, then, the key questions seem to be the following:
Should you start collecting sales taxes based on existing state tax rates?
First of all, the Supreme Court decision allows states to collect sales tax on internet sales; it does not mandate it. States still have to enact laws before they can require you to pay any sales taxes that you are not required to pay now. If you believe that states might pass “retroactive” tax laws, you should. But that’s highly unlikely. No matter how liberal a state may be (Illinois, for example,) it’s doubtful that its legislature would want to place such an undue burden on its business community.
Where can you find the most current tax legislation? Here’s where you can find all of the individual states’ online sales tax collection policies in effect at the time of the South Dakota vs Wayfair et. al ruling. For now, if you’re in conformance with these, you’re fine. However, you need to keep up-to-date with the latest legislation in each state in which you sell. There will be changes coming, and compliance will be your responsibility.
Will small sellers be affected, or only large companies like Amazon.com, Overstock, Wayfair etc.?
It’s not safe to assume that smaller sellers won’t be affected by any of the various state laws. While proposed federal legislation of years’ past (the Market Fairness Law of 2015; it never passed) focused on companies with $1 million or more in sales, there is no guarantee that states will adopt this standard. And even if some do, there’s nothing to stop others from going their own way. However, because the “big guys” make better targets from a public relations perspective (and generate more potential tax revenue), it wouldn’t be surprising to see them being the only target of state sales tax collection efforts.
Is there software that can calculate the appropriate taxes to charge?
Yes, there is, and there will no doubt be an avalanche of new software products to help sellers cut through the muck and mire of bureaucratic complexity that is about to befall us. Technology has a way of finding answers to the tasks that seem impossible to tackle. Choosing the right solution for your business is another issue altogether, and for that, you’ll require expertise.
Can you find help, or are you in it alone?
With the right e-Commerce solutions partner, you are never alone. And, if your partner is Adeo Web, you’re working with a company that has built a culture of expertise, trust, and transparency. Combined with Adeo Web’s deep domain expertise in the Magento environment, you can be sure that your online store will have the most efficient, economical and effective solution to the new (post South Dakota vs Wayfair) sales tax requirements.
No doubt about, the new Supreme Court decision could require you to pay more in sales taxes, but with the help of Adeo Web, the situation need not be as “taxing” as it would seem.