We are preempting our regular Sales Tax Tuesday ‘state-by-state’ travel feature for this special report on last week’s U.S. Supreme Court ruling that will impact sales tax collections for a good long time. Sales Tax Tuesday 2018 is a joint venture between Insightful Accountant and Avalara, 'the Sales Tax people', it's purpose is to update you on what's new and different in Sales and Use tax since our first year-long Sales Tax Tuesday adventure way back in 2015.
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But despite our best intentions to bring you our infamously informative ‘tour like journey’ paying sales tax all long the way it seems that the news makers want to throw us a bone from time to time and give us something more important to write about than ‘what to see’, ‘where to go’, and ‘what to eat’ in a state near you, as well as the sales tax specific of that state that will impact you while you are seeing the sights, traveling through, and dining in style.
As such it is becoming increasing clear that our Sales Tax Tuesday 2018 series will be much more like a Sales Tax Tuesday 2018/2019 series than initially anticipated. Still the same the folks at Avalara are hanging in there and providing supporting content for anything current coming your way. With that said let’s look at last week’s monumental decision.
As a result of the U.S. Supreme Court 5-4 ruling in the case of South Dakota v. Wayfair, Inc. issued late last Thursday, states who have not already done so may pass laws requiring all online retailers to collect sales tax and remit it to the state where the customer is resident.
The case challenged the physical presence standard upheld by the Supreme Court in Quill Corp. v. North Dakota (1992). In that case the court held that a state cannot tax a business unless it has a substantial connection (nexus) with the state, defined as a physical presence. That decision has now been repealed, and this case has been remanded to the South Dakota Supreme Court "for further proceedings not inconsistent with" the Supreme Court opinion.
In the Dakota v. Wayfair, Inc. ruling the majority of justices held that “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, are overruled.” The court found Quill to be flawed saying, “Quill creates rather than resolves market distortions…The Internet's prevalence and power have changed the dynamics of the national economy."
The decision went on to elaborate, that the physical presence rule “is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced. The rule also produces an incentive to avoid physical presence in multiple States, affecting development that might be efficient or desirable.”
Justice Kennedy, writing on behalf of the majority specifically elaborated, that “This Court should no prevent State from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or building in a State.”
The decision is largely viewed as a victory for states and local governments who have felt since the popularity of eCommerce that they were being unfairly deprived of sales tax revenues by companies selling on-line to customer who would otherwise have paid sales tax to in-state retailers. The decision is also considered a victory for in-state retailers who felt they were being deprived of sales opportunities caused by the ability of out-of-state retailers to offer the same merchandise to customers without having to charge those customers sales taxes.
Under a previous ruling, if a business was shipping to a customer where the company didn’t have any physical presence, the business didn’t have to collect sales tax for the purchase. In those cases, customers bore the responsibility for paying ‘use taxes’ in lieu of sales taxes, but many customers were unaware or simply ignored their responsibilities, and states and local governments believed they were losing out on potentially billions in lost tax revenues.
Sales and Use Taxes
Some states estimate that Thursday’s decision could make as big as a 50% increase in sales tax revenues collected; however, most estimate in the 20 to 25% range. The variation is due to the extent to which major on-line retailers such as Amazon may have already agreed to collect sales taxes for a specific state on merchandise sole directly to companies within that state. Obviously where such large on-line presences are already collecting and making payments, the recent decision will have a significant lesser impact than where such on-line retailers have not previously seen the ‘writing on the wall’ and made collections and remittances voluntarily.
While the Supreme Court decision is viewed as a victory of sorts by states, counties and cities/town, long with in-state retailers, it is still not viewed as the establishment of a totally level ‘playing ground’ when it comes to sales taxation. Many state officials and trade organizations blame Congress for failing to act to implement a nationwide system for implementing fair sales tax rules for online sales.
Still the same, many small brick-n-mortar store owners view the court’s decision as a ‘saving grace’ considering the ever-expanding eCommerce influences that have resulted in the closure of many local merchants as more and more buyers turned to on-line resources even for the day-to-day purchases.
As a side note, markets reflected in mixed trading in response to the news. For example, exclusive on-line retailers saw declines in their values…Amazon lost 1% of their share value, Wayfair lost 1.9%, Overstock fell 7% and Etsy slipped 1.4%. On the other hand, large retail chains with multiple local stores traded higher after the ruling…Target gained 1% and Nordstrom gained 1.8%.
Many states had enacted ‘economic nexus’ to establish thresholds in which on-line retailers had to either collect and remit taxes to the state or provide information on their customers and sales for purposes of allowing the state taxing authorities to seek-out taxpayers with obligations. It’s still unclear how such provisions will be applied in light of Thursday’s ruling, but one thing is certain, with the existence of both ‘economic nexus’ legislation and the decision by the Court, almost every state will be seeing significantly higher sales tax revenues to bolster their budgets. Similarly, most county and local governments that rely on sales tax revenues will also see a windfall in response to this court decision.
It’s more than probable that other states not having already enacted economic nexus legislation will rush bills through their legislatures based upon the same principles established by South Dakota SB 106. It’s also possible that Congress will now take steps along one of three different avenues including the Senate Bill titled the Marketplace Fairness Act or the Remote Transaction Party Act both of which allow states to tax out-of-state sales, or they could attempt to undo what the Court ruled by enacting even more stringent interstate commerce provisions with the No Regulation without Representation Act floating about in the U.S. House of Representatives. However, with the political deadlock experienced in recent years on almost every important topic, the ability to pass legislation of such magnitude in either favor of, or opposed to, sales taxing authority by the states is pretty much a ‘crap shoot.’
In the dissenting opinion that accompanied Thursdays Supreme Court decision the four dissenting Justices highlighted the more than 10,000 tax jurisdictions and complexity of state tax laws that will impact almost all on-line retailers. In so doing they cited examples including, “New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters. ... Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant.” These examples along with the thousands upon thousands of tax jurisdiction rates and boundaries are exactly the types of sales tax complexities that make ‘manual sales tax administration’ almost impossible, especially now that merchants everywhere will need to collect and remit sales taxes to distant states and taxing jurisdictions far and wide.
Sales Tax
Now, more than ever, merchants will be forced to deal with the increasing complexities of sales tax compliance. Not only will their local state be out ‘after their hide’ if they make a mistake, but every state in which they make sales to customers will also be out to enforce sales tax collection and remittance. That's why, with the implementation of remote sales taxation that will arise subsequent to this Supreme Court ruling, everyone making retail sales will need a sales and use tax expert like Avalara helping them integrate sales and use tax collections and reporting into their overall business framework.
By providing sales tax automation solutions, including tax calculation, exemption certificate management, returns processing and 1099 filing and reporting, Avatax can give you the assurance of compliance without sacrificing productivity so that your sales tax is way less taxing than ever before even with the complexities of economic nexus.