Official Newspaper of Eddy County since 1883
Official Newspaper of Eddy County since 1883
The United States Supreme Court ruled on Thursday, June 21 that states can now assert nexus (connection) for sales and use tax purposes without requiring a seller to have a physical presence in that state.
This decision by the Supreme Court in South Dakota v. Wayfair, Inc. overturns the Supreme Court decisions that set precedent in Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill. (1967). Both of these decisions required retailers to have a physical presence in the state before the state could require a seller to collect sales tax from the customers in that state.
South Dakota, like many other states, imposes sales and use taxes but estimates that it loses at least $48 million per year in sales and use tax revenues from sales to South Dakota residents by out-of-state businesses who do not collect sales tax. South Dakota relies heavily on its sales and use tax, which makes up about 60 percent of the state’s funds each year because it has no income tax.
To make up for some of these losses in revenue, South Dakota adopted a law that required out-of-state sellers that delivered more than $100,000 of goods or services into the state of South Dakota or engaged in 200 or more separate transactions to collect and remit sales taxes to South Dakota. However, South Dakota legislators knew their law would be unconstitutional unless the Quill decision was overturned and filed an action in state court against Wayfair, Inc., Overstock.com and Newegg Inc. These large internet merchants had no employees or real estate in South Dakota and did not collect South Dakota sales tax. The state was also seeking an injunction that would require these large merchants to register for South Dakota tax permits to collect and remit sales taxes. The companies argued that the act was unconstitutional. It was appealed to the Supreme Court after the law was found unconstitutional by South Dakota courts.
Supreme Court Justice Anthony Kennedy wrote the decision that criticized the Quill decision and was joined by Justices Clarence Thomas, Ruth Bader Ginsberg, Samuel Alito and Neil Gorsuch. Chief Justice John Roberts wrote the dissenting opinion and was joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan. In dissent, Chief Justice John G. Roberts Jr. said the court should have waited for Congress to decide the issue. He said Congress has the power to regulate interstate commerce, and changing the tax rules state-by-state has “the potential to disrupt the development of such a critical segment of the economy.” He also took issue with the majority’s conclusion that the burden on small businesses would be minimal. Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan agreed.
North Dakota Tax Commissioner Ryan Rauschenberger issued the following statement regarding the recent Supreme Court ruling:
“I was pleased to hear that the Supreme Court overturned Quill vs. North Dakota.” Rauschenberger said. “This will go a long way to ensure local businesses are on a level playing field with online retailers. I’m glad the Supreme Court was able to recognize the unfair advantage online retailers have. The North Dakota Legislature passed a law during the 2017 session to address remote seller sales tax. Remote sellers will be required to collect and remit sales tax to North Dakota only if they make a minimum of either 200 sales or $100,000 in sales per year in North Dakota, even if they don’t have a physical presence here. Over the next few weeks, our office will be working to implement this new law change.”
The ruling is expected to be a significant revenue generator for many states. California, alone, expects the ruling to generate an additional $2 billion, a significant amount, especially for a cash-strapped state. President Trump praised the ruling, as did the National Conference of State Legislatures called the ruling “a victory for Main Street America. Brick-and-mortar stores will no longer be penalized for collecting the tax revenues that fund our schools, infrastructure and the vital public services that state and local governments provide,” said South Dakota state Sen. Deb Peters, the group’s president.
Matthew Shay, president of National Retail Federation, said, “Retailers have been waiting for this day for more than two decades.… This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”
Not all states support the ruling, specifically, the five states that don’t collect sales tax. Both Montana’s Attorney General has filed a complaint, saying they have “fought long and hard to keep the state sales tax free” and say “it is an undue burden on their small businesses to be the tax collector for other states who choose to use sales tax as a form of revenue.”
The challenges will not be felt by the large online businesses as much as they will for the smaller businesses. Online giants like Wal-Mart and Target were already collecting sales tax because they have a large physical presence in most states. Amazon will also be largely unaffected because they started collecting sales tax last year.
Those smaller businesses are concerned, especially the merchants who sell lower priced items. A merchant that has 200 transactions in one state, selling each item at $15 would have a gross sale of $3,000. That merchant can hardly be in the same category as a merchant with $100,000 in sales.
“This makes life very difficult for people like me,” Allen Walton, the CEO of SpyGuy.com, an online seller of security equipment, told NBC News. “Now I have to keep track of the tax laws and collect and report tax in 50 states and over 3,000 counties.”
With states looking to reap billions in potential tax revenues, online resellers may not only be forced to collect taxes from their customers across the country but to also file tax forms in states, counties and other local regions where business was transacted. Remember – each local jurisdiction has different rules, regulations and forms. This is not going to be an easy task for small merchants.
A case in point comes from a brief filed by eBay, which stated, “To determine the tax applicable to a product or service, the seller must know which characteristics of each of its products are relevant to sales tax classification – and that varies dramatically among the 10,000 different sales tax jurisdictions.” The brief goes on to explain that “tax rates can vary by price (in Connecticut, dresses over $1,000 carry a higher tax rate), by use (in New Jersey, yarn for art projects is taxed, but yarn for clothing is exempt); and by ingredients (Snickers are taxable in Illinois but Twix are not because items containing flour are not categorized as candy). Software cannot provide an answer if the seller does not know what characteristics to flag and the cost and accuracy of software is highly debatable.”
Ironically, the biggest winners from this decision, according to Justice Elena Kagan, are probably the large online shopping sites like Amazon. These companies have the infrastructure in place which they are willing to offer as part of their services to the smaller online merchants, for an additional fee. The very sites that were supposed to already have an unfair advantage, have now been given another revenue stream.
Many advocates are calling for further clarification of the ruling and are hoping that most states will exclude smaller online merchants from any new filings. Congress may now decide to move ahead with legislation to provide a national standard for online sales and use tax collection, such as the Remote Transactions Parity Act or Marketplace Fairness Act, but it’s probably fair to say that we haven’t heard the last of this issue.
