Anyone who has paid attention to the news over the past week has probably noticed that the Supreme Court recently granted states with the authority to tax online sales even when the selling party has no physical presence in the state. The decision in South Dakota v. Wayfair addressed a law designed to overcome a revenue emergency in South Dakota and that directly conflicted with current case law. The decisions will force many small businesses to collect sales tax in states into which they deliver products.
For decades, online sellers have relied on two landmark decisions regarding online sales. In 1967, the Supreme Court first ruled that states could not collect sales tax from retailers without a physical presence in the state. It later upheld that rule in 1992. The reasoning was that the Dormant Commerce Clause – the imagined Constitutional provision that prohibits states from unduly burdening interstate commerce – prohibited states from exercising the tax powers against a business that was not physically in the state. The Court found that prohibiting states from exercising their tax power when the retailer was not present had created an unintended tax shelter for major online retailers that cost states billions in tax revenue. This de facto shelter also created substantial economic support for major online companies while harming the local companies. The Court reasoned that while purchasers were required to pay the use tax on goods purchased over the internet, the vast majority did not. This created an incentive to purchase items online rather than go to the brick and mortar store in the state. Failing to overturn prior precedent would continue judicial support of this practice and prevent the law from moving into the twenty-first century along with the technology that created the shelter.
This decision leaves many unresolved questions for companies that sell over the internet. The South Dakota law that was upheld allowed for taxation of internet sales when the online seller delivered more than $100,000 in goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the sates on an annual basis. The Court ruling applies specifically to the South Dakota law, which only applies to businesses that do “a considerable amount of business in the State.” Without creating a bright-line rule, the Court upheld the law because it “applies a safe harbor to those who transact only limited business in South Dakota. While it isn’t clear how the Court will ultimately define “limited business,” it is certain we will know soon. Forty-one states filed briefs in support of overturning the prior decisions and the rest are quickly joining in enacting internet sales tax laws in compliance with the ruling. Until the Court has an opportunity to rule on the lower limits of the size of business transaction that is subject to online sales tax, businesses engaged in internet sales should prepare to comply with whatever internet sales tax law a state may impose.
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