Supreme Court agrees to hear ‘Internet Sales Tax Case’
On January 12, 2018 the U.S. Supreme Court agreed to hear the State Court case of South Dakota vs. Wayfair Inc. For many years the Supreme Court has basically punt on this white elephant issue (i.e., Federal law for the taxation of internet sales). And for the last 10 years most state courts have mostly stopped short of crossing the line of taxing out-of-state, online retailers with no physical nexus.
The most recent defining historical Supreme Court case was the 1992 Quill Corp. v. North Dakota, 504 U.S. 298. This 1992 case effectively prevented states from collecting any sales tax from retail purchases made over the internet or other e-Commerce route unless the seller had some type of traditional physical presence in the state.
The ruling was based on the Dormant Commerce Clause, which prevents states from interfering with interstate commerce. The case resulted from an attempt by North Dakota to collect sales tax on licensed computer software sold by the Quill Corporation (an office supply retailer with no North Dakota presence), that allowed users to place orders directly with Quill.
The decision in Quill has been a significant sales tax roadblock for states as e-Commerce had exploded during the 21st century. A more recent Federal friendly decision in the 2015 Direct Marketing Ass’n v. Brohl, 575 U.S., suggested a review of Quill. As a consequence, several emboldened states passed “kill Quill” laws to force a review by the Supreme Court. This case is a direct result of that decision as well as several states enacting laws that seem to conflict with the 1992 Quill case.
Note, this 2018 Supreme Court case involving North Dakota is not coincidental. North Dakota has a sales tax on all goods (tangible personal property) and services and therefore makes for a better test case.
If the court takes a definitive position, then it will surely allow some sort of universal internet taxation for online sales. Almost overnight, all states will pass sales tax laws which will require for collection of sales tax in their State. This could be a potential nightmare scenario for online retainers, especially the smaller ones. Imagine each sales tax state forcing every online retailer to register and collect tax. Many states, including Texas, have complex sales tax laws reading not only what is taxable but also there are 1000’s of local taxing jurisdictions that might have to be considered. That would mean all online retailers would be subject to sales tax audits by dozens of states other than their own (and those audits may or may not be accurate). If a liability is established, then I am betting that all sales tax states would have some type of reciprocal agreement to allow for the collection in their state of another state’s audit liabilities. It would be hard to imagine how any one state could even audit over 100,000 or more online out-of-state sellers effectively. It could even mean that each state would conduct sales tax audits for eachother.
Consider this recent event. In late 2017 Amazon (online retailer) was sued by the Massachusetts Department of Revenue to provide ALL out-of-State 3rd retailers sales information for businesses who sell into their state via an in-state FBA (fulfillment by Amazon). I wrote a blog article on this subject which you can read here. The business data being demanded includes:
- Business Contact information (name, address, federal tax ID number, and phone number)
- The estimated dollar value of the products sold from the seller’s inventory in the Massachusetts fulfillment centers
The issue of online sales tax has been brought up in several bills in Congress in recent years but nothing has happened. The issue of brick-and-mortar stores vs. online retailers simply must be addressed and it seems the Supreme Court intends to deal with it. It is obvious that ‘sales tax’ States are losing massive amounts of revenue and physical retailers are being hurt as well. Stay tuned for as this South Dakota vs. Wayfair Inc. as it is considered by the highest court.