Many Ecommerce Companies Don’t Have to Collect Out-of-state Sales Tax. But Will They Soon?

Ecommerce businesses without any physical presence in a state may soon be required to collect sales tax from its customers – more commonly known as Internet Sales Tax – or so argued the state of South Dakota in the U.S. Supreme Court last week.

Last Tuesday, the Court heard arguments in South Dakota v. Wayfair, a case in which several online companies including Wayfair are challenging a 2016 South Dakota state law requiring them to charge sales tax on goods and services sold to South Dakota customers even though the companies do not maintain a physical presence in the state.

South Dakota’s law has been struck down as unconstitutional by state court in South Dakota based on an older U.S. Supreme Court case, Quill Crop. v. North Dakota. In 1992, the Court ruled in Quill that out-of-state companies – at that time, usually a catalog company – did not have to collect sales tax from their customers in those states.

The Court in Quill also encouraged Congress to resolve the issue through legislation, but Congress has yet to tackle the issue. After waiting 25 years for congressional action, some states decided to take matters into their own hands. South Dakota not only passed its Internet Sales Tax law in 2016, but quickly went to court to enforce it against online retailers who failed to register with the state to collect taxes. The companies’ primary defense is the Court’s ruling in Quill, which the Court can now decide to affirm or overturn. Meanwhile, dozens of other states have lined up in support of South Dakota, claiming that Quill diverts billions of dollars every year from state and local tax-funded programs.

At oral argument, the Justices did not give a clear indication of which way they will rule. Justice Sonia Sotomayor noted that overturning Quill begs “many unanswered questions” and what may amount to a “massive amount of lawsuits.”

The Court can only answer the question before it. And the South Dakota law does not reach every online retailer with South Dakota customers, only those with sales of more than $100,000 in the state or more than 200 transactions with in-state customers. The South Dakota law also doesn’t allow retroactive tax collection. So even if the Court rules that South Dakota’s law passes constitutional muster, other state laws requiring much less economic interaction with a state or retroactive tax collection might not.

The Justices grappled with those concerns during oral argument, as well as what is fair to brick-and-mortar businesses who may be losing sales to online competitors and to small online retailers without the ability to navigate thousands of local tax laws.

What Does This Mean for Ecommerce Businesses?

If the Court reverses Quill, at least far enough to allow South Dakota’s law to stand, several other states already have laws in place to require state sales tax collection and online retailers should expect many more to follow suit. And even if companies challenge some of these new laws as unconstitutional for reasons left unaddressed in South Dakota’s case, the immediate new burden on online retailers could be substantial. There are more than 10,000 separate tax jurisdictions within the 45 U.S. states that currently collect sales tax, creating a complex issue that many small- and medium-sized companies may not have the bandwidth or financial resources to manage.

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“The challenge that I see is cost. There are companies who stay current with sales tax rates, provide sales tax calculations, offer sales and uses return preparation and tax advice,” says cleverbridge Tax Manager Krystle Pelayo. “The bigger companies will be able to afford the cost or manage it themselves in-house, however smaller ones companies may have to opt out and only sell locally or in a much more limited number of locations.”

In terms of competition, says Pelayo, a passing win for South Dakota’s tax law may level the playing field among digital businesses themselves, but increase the ongoing fight for the consumer dollar between digital and brick-and-mortar.

Consider price points and customers jumping to a competitor for a better value.

“Ecommerce companies would no longer have to worry about their digital competitor not collecting sales tax in a state that they’re in,” Pelayo continues. “Consumers will be less likely to abandon their cart to go to another website who doesn’t charge tax. Though even as ecommerce competition may lessen, the likelihood of a consumer performing in-store research and then purchasing online at a lower price may lessen as well.”

Keystone

The Supreme Court is expected to rule on the South Dakota law by late June. But even if the Court decides that the law doesn’t pass constitutional muster, there’s no doubt states will continue trying to find a way to work around Quill. It would be wise for online retailers to begin planning for a more complicated future of collecting sales tax.

Kyle Shamorian is the content marketer for cleverbridge.

Katherine Minarik, Group General Counsel, contributed to this article.