Sales Tax and eCommerce

April 17, 2018 – Not only was it the date that most income tax returns are due, but it is also the same date that arguments were heard at the US Supreme Court to decide how states could collect sales tax going forward. In South Dakota v. Wayfair, Inc., the State is challenging a 1992 court ruling that says sales tax can’t be charged unless a business has a physical presence in that state.

Brief History on Sales Tax and Interstate Commerce

In the early 90s, the North Dakota State Tax Commissioner sought to require out of state businesses to collect sales tax on sales shipped into the state. One of those businesses, Quill Corp., fought with the State and went to court in order to avoid charging sales tax to its customers. In 1992, the US Supreme Court ruled in favor of Quill. The decision essentially created a bright line test where states couldn’t impose sales on tax on any transactions unless the seller had a physical connection to the state (e.g. a store front within that state). The Quill decision has been used by businesses to avoid collecting sales tax on interstate sales ever since. As the volume of internet sales has increased over the years since Quill, states have seen millions in lost revenue and now they are fighting to change the law in their favor.

South Dakota v. Wayfair, Inc.

In 2017, South Dakota enacted a new law so that it could collect sales tax from out-of-state vendors on purchases made by in-state residents. In other words, it was a new law that went against the Quill decision. Wayfair, Inc., Overstock.com, and Newegg took issue with the new law and decided to fight it out in court. The lower courts in South Dakota ruled in favor of Quill, as did the South Dakota Supreme Court. South Dakota then petitioned the US Supreme Court to overturn the Quill decision and were granted a hearing to argue their position.

What happens if Quill is overturned?

If the US Supreme Court agrees with South Dakota, they could overturn the 1992 Quill decision. By doing that, any state could impose sales tax regardless of whether or not a business has a physical connection to the state. Who would win if Quill is completely voided? Small businesses and state governments.

Generally speaking, small businesses don’t have a national distribution and are focused on customers within their own state. They have to charge sales tax on their sales because there is a clear physical connection to the state they operate from within. If an out-of-state vendor is offering the same products free of sales tax, the price of those same goods will be lower than the local small business and customers may choose to go with lower cost item. Overturning Quill would level the playing field for small businesses.

Should Quill be overturned, state governments would gain millions of dollars in annual sales tax revenue. For example, if NJ was able tax an additional $1 billion of sales from out-of-state vendors it would generate $66,250,000 in additional revenue for the state. As state budgets grow tighter and tighter, an overturning of Quill would create immediate benefits for every state.

Summary

In summary, South Dakota v. Wayfair, Inc. is an extremely important case that we should all pay attention too. Not only would it impact the way that out-of-state vendors conduct business, but it would also lead to a huge increase in tax revenue for the states. A decision is likely to come sometime in June 2018, so stay tuned for an update.