U.S. Supreme Court Rules Online Retailers May Be Subject to State and Local Sales Tax Laws

From the Desk of Zach Wimberger, Tax Services Team

On June 22, 2018, the Supreme Court made its ruling in the South Dakota v. Wayfair Inc. case that is likely to have effects on everyone from the casual internet shopper to some of the largest businesses in the country.

Nexus, also called “sufficient physical presence,” is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. The Court ruled states can assert nexus for sales and use tax on any retailer, regardless of whether that retailer has any physical presence in the state. This was a reversal of prior Supreme Court cases that ruled that retailers were not obligated to collect sales tax in states where they had no physical presence. With the new ruling, retailers may now be subject to the local sales tax laws in states where they have sales of any tangible personal property across state lines, regardless of nexus.

South Dakota: A Blueprint to Sales and Use Tax Law?

The petitioner of the case, the State of South Dakota, has estimated losses of $48 to $58 million a year in sales and use tax revenue due to out-of-state businesses conducting business with South Dakota residents. To try and counteract the loss of revenue, the State enacted a sales tax provision in 2016 that states if an out-of-state retailer crossed a certain threshold on the amount of sales in a given year, the retailer must collect and remit sales taxes. With the Supreme Court’s ruling, it is now expected by experts that all other states that have sales tax laws will look to South Dakota’s model as a baseline for new sales tax provisions. The Court specifically observed that the South Dakota tax law was designed in a way to minimize the burden on interstate commerce.

Along with states enacting new nexus laws, there is also some expectation that Congress may look to pass legislation to provide a national standard for interstate sales and use tax collection. The 2013 Marketplace Fairness Act, which would allow states to collect sales tax from out of state retailers if the state simplifies its sales tax system, has been debated in Congress for years, but has yet to be received in the House of Representatives. This ruling may now allow the bill to reach the floor for consideration. There have also been recent proposals from Representatives such as Bob Goodlatte (R-VA), who argues the sales tax rate should be based on the location of the seller, but remitted to the location of the buyer.

Regardless of if Congress looks to move quickly on the Wayfair ruling, it is expected that businesses will see a rapid response from states in regard to nexus law and we are recommending all of our clients that conduct interstate business to keep an eye out for any laws passed in states that they routinely do business in.

We will be on the lookout for any developments stemming from the ruling. If you have any questions, please email us here info@rosenfieldandco.com.

 

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