State Sales Tax in The Internet Age
The internet has changed everything. It has altered the way people consume information, conduct business, shop, eat, and live their everyday lives. One of the largest changes has been how retailers sell their goods. In the internet age, most retailers need to sell their products online to survive. This has created a complicated and controversial sales tax issue: when an online retailer sells products in a state, yet lacks a physical presence in that state except for the shipment of goods to consumers in that state, does that online retailer need to collect and remit sales tax in their customer’s state?
The Supreme Court resolved this issue in its decision in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018) (“Wayfair”).
The state of South Dakota was concerned about the erosion of its tax base and loss of funding due to a lack of sales tax generated from online retailers who sold goods to South Dakota residents but did not have a physical presence in the state. To remedy this decline in revenue, the state enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.” The South Dakota act covered sellers that annually deliver more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state.
Unsurprisingly, large national online retailers, such as Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., challenged the constitutionality of South Dakota’s law.
Prior to its decision in Wayfair, the Supreme Court had held in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (“Quill”)that the dormant commerce clause barred states from compelling retailers to collect sales or use taxes in connection with mail order or internet sales made to their residents unless those retailers had a physical presence in the taxing state.
The Internet “Changed the Dynamics of the National Economy”
The revolution in commerce driven by the internet in the 16 years since Quill caused the Supreme Court to have a change of heart.
In Wayfair, the Court overturned Quill and held that states may charge tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. This decision was largely based on the fact that "[t]he Internet's prevalence and power have changed the dynamics of the national economy."
At the time Quill was decided, revenues for mail order products were around $180 million, while e-commerce retail sales in 2017 were estimated at $453.5 billion.
In the wake of Wayfair, a majority of states have enacted laws requiring online sellers to collect sales tax. However, each state has adopted its own legislation regulating this issue. Some states copied South Dakota’s approach and now require sellers who annually deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of products or services into the state to collect sales tax.
Keeping Up With Over 10,000 Taxing Jurisdictions
However, there is no uniform standard for sales tax collection. As such, online retailers need to understand and comply with sales tax laws in over 10,000 different taxing jurisdictions since, in many states, sales tax rules and administrative processes can vary by city, county, school district, or other governmental subdivisions. The burdens this imposes on online retailers have prompted many companies to purchase software to help them identify and meet their obligations across this patchwork of laws.
Online retailers who sell to consumers nationwide and are not currently collecting sales tax for online sales should seek both legal and accounting advice to ensure that they comply with the law everywhere they do business.