The recent case before the U.S. Supreme Court was South Dakota v. Wayfair, Inc., et al. in which the State of South Dakota was seeking to collect sales tax from all online transactions, even for businesses without a physical presence in the state. Prior U.S. Supreme Court decisions in 1967 and 1992 only allowed such taxes to be collected on sales from businesses with a physical presence in a given state. The South Dakota case argued that there is an extremely low rate of consumer compliance with laws mandating they self-report and pay sales tax for online purchases. The State of South Dakota estimated an annual loss upwards of 50 million dollars.
In late June of 2018, the Supreme Court finalized a closely divided 5-4 ruling that states can impose sales tax on all online purchases, even if the company has no physical presence in the state. Large online retailers like Amazon, Overstock, and Wayfair saw an immediate drop in their shares in response to the ruling even though they already collect state sales tax in a large number of states. The Supreme Court ruling overturned its own 1992 Quill decision but did not make the South Dakota law constitutional, leaving to lower courts and Congress the specifics for the impact on smaller businesses.
The dissent to the ruling included the opinion that the decision will impact innovation and entrepreneurship and that Congress, not the Court, should handle this decision. Congress, however, is nowhere near a reaction from a federal standpoint. It has been tossing around everything from a variety of “fairness” acts to a proposal that sales tax should become a business burden instead of being a consumer burden.
The majority opinion was that the dynamics of our natural economy have changed under the influence of the Internet and that this new ruling closes the tax-free shopping loophole that the 1992 decision created. 31 states already have in place laws taxing Internet sales but some rely on consumers to pay the taxes via the honor system. The increased online presence of retailers makes outdated what was, basically, a tax shelter created when the courts deemed necessary a physical presence in order to impose sales tax. The 2018 Supreme Court ruling is considered an equalizer of sorts by requiring online retailers to follow the same laws as brick-and-mortar stores since the earlier decisions of 1967 and 1992 created an unforeseen inequitable situation.
States without a state tax, such as New Hampshire and Florida, are concerned that the decision will require their businesses to become tax collectors for other states. And although small businesses may seek legal relief from the tax burden, there is concern that small businesses will still bear the brunt of the Court’s decision. The obvious assumption is that retailers will pass on to customers the burden of the expense, making the pricing of products from smaller online retailers less competitive. There are predictions that the ruling may compel some consumers to return to shopping locally. There are also concerns regarding the complexity of dealing with each state’s sales tax laws and that this could prove to be an overwhelming task for smaller, online retailers.
The ruling only directly affects South Dakota. What will happen in other states remains to be seen. The South Dakota law impacts businesses with more than $100,000 in annual sales or 200 or more transactions in the state each year. The Supreme Court warned that more complex or overreaching laws may impose a burden on interstate commerce. It has been acknowledged that any states seeking to go beyond the South Dakota thresholds or to collect sales tax retroactively will have to fight their own court battles.
As online consumer spending continues to grow, by 16% in 2017 – over $453 billion, challenges for portions of the revenue will also grow. There now exists a large amount of uncertainty for small businesses as they wait to see if other states model new laws after those of South Dakota or if they look to impose more aggressive sales tax legislation. Until those battles are hashed out in the courts, small businesses will continue to fight for their place in eCommerce.
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