In a landmark decision by the U.S. Supreme Court on June 21, 2018, the gates to the collection of sales tax on internet sales were flung wide open, revealing the promise of significant new revenue for 45 states.
In brief, the overall issue at the court’s feet in South Dakota vs. Wayfair was whether states have a right to collect tax on sales made in their state by remote sellers, regardless of whether the seller has a physical presence in the taxing State. According to the Court’s opinion, the estimated sales tax revenues being lost each year because of the nexus rule range from $8 to $33 billion. In previous cases of Quill and Bella Hess (links below), the Court had ruled against states’ authority to collect sales tax without substantial nexus under multiple facets, the most significant being the physical presence test levied under the Quill decision. Ultimately the Court decided the physical presence rule of Quill was “unsound and incorrect,” further calling Quill “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.”
Additionally, the Court stated that “the physical presence rule [Quill] defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”
While narrowly overturning Quill (5-4), the Court did so in the broadest possible sense deferring to the baseline nexus interpretation within Complete Auto Transit vs. Brady (1977) which states, “… [a] tax on the privilege of doing business in a State [is] held not to violate the Commerce Clause when it is applied to an interstate activity [regarding a business] with a substantial nexus with the taxing State (emphasis added), is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”
What’s Next for States?
States now can establish or enforce laws requiring remote sellers to charge and remit sales tax on internet purchases.
In a previous alert, we discussed Georgia’s recently passed HB 61 which requires online retailers who make at least $250,000 or 200 transactions a year in Georgia to either collect and remit state sales tax on purchases or send “tax due” notices annually to customers who spend at least $500 on their sites. With the Supreme Court’s decision, the effective date of Georgia’s law – January 1, 2019 – looms large for online sellers.
Minnesota’s Department of Revenue issued a formal statement just hours after the Supreme Court announced its opinion and said the State will work to ensure “fair, efficient and transparent implementation” of the decision and will provide guidance within 30 days. If this is any indication of the current environment, other jurisdictions will waste no time working toward implementation of sales tax collection on remote sellers.
What’s Next for Businesses?
Businesses have run out of “wait and see” time. Now, they must act quickly and efficiently to:
- Understand each state’s sales tax laws (now, and as they are enforced, updated or changed over the coming months).
- This will include the thresholds at which businesses must comply with each state’s sales tax laws. Not every online seller will be required to comply. As discussed in the paragraph about Georgia’s HB 61, there will be thresholds designed to avoid placing “undue burdens” on smaller businesses. They may – and already do – vary among states.
- Develop a strategy and plan to begin registering, collecting and reporting in accordance with state laws where necessary. While understanding just a few states’ sales tax laws can be daunting, the coming months promise to introduce remote sellers to a growing list of states with varying sales tax collection laws. This increases the chance for costly noncompliance.
- Evaluate all options for compliance processes and reporting, and develop a process to implement these changes as quickly and efficiently as possible without interrupting the normal course of business.
It is imperative that businesses engage a well-qualified, knowledgeable sales and use tax team to help them navigate strategy, planning and reporting for this new, complex sales tax landscape. Smith & Howard’s sales and use tax team can help; our knowledge of state sales tax laws and constant monitoring of emerging laws over the coming months will offer a tremendous advantage to your business.
Additionally, we recognize that without a well-thought-out sales tax strategy and the potential use of an automated solution to assist in calculation and remittance functions designed with your business in mind, your plan could fall flat over the long-term. Our technology consultants are an important part of our overall sales and use tax team and can tailor a solution to meet your needs.
Please use the contact form below to schedule your review and/or to see how our Sales & Use Tax Team can work with your business to get your ready for the new sales tax landscape. Our initial consultations are always completed free of charge, and we look forward to working with your business through the ever-changing tax landscape.