In a 1992 landmark decision (Quill Corp. vs. North Dakota) the Supreme Court said that a seller had to have a physical presence in a state before that state could require it to collect sales tax. For example, ABC, Inc. a New York corporation, not having offices elsewhere sells through a catalog delivered by mail. A customer in Maine orders snow shoes. Under that decision ABC, Inc. would not have to charge sales tax on the snow shoes. If ABC, Inc. opened a manufacturing plant with one employee, or stored inventory in Maine, that state could require it to collect sales tax.
But, in 1992 online sales barely existed. Now, they account for a substantial, and fast growing, segment of the overall market. Many states have devised ways to capture some of those lost sales and have devised a number of ways to create a “connection” between an out-of-state seller and the state. One of the most popular is the “click-through nexus law”. Basically, if a buyer clicks on an ad on a website maintained in the state where the sale is made. There’s usually a threshold on such sales. For example, the rule doesn’t apply until sales in the state top $10,000. There are other approaches that are not as popular. Finally some states have not yet addressed the issue.
In the current case decided by the U.S. Supreme Court, South Dakota vs. Wayfair, Inc., South Dakota enacted a law in 2016 that required out-of-state retailers that deliver more than $100,000 in goods or services or make 200 or more transactions annually in the state to collect and remit sales tax. The law was written in such a way to enhance its chances for surviving a court battle that did, indeed, come to pass. The Court found a number of faults with the 1992 Quill decision and noted the changes created by the internet since then. The Court found that the 2016 South Dakota law was valid, noting that the safe harbor threshold for activity did not unduly burden businesses.
So, what does this all mean? Look for most states to enact laws to tax out-of-state sellers using a safe harbor threshold similar to that in use by South Dakota. Using the same threshold would make challenging the state law impossible. A lower threshold could leave the state vulnerable. States with dissimilar approaches currently may change their laws. It’s possible Congress could enact legislation to avoid a multitude of different laws. That seems unlikely given the current state of Congress. If you sell via the internet and your sales could reach the thresholds mentioned above, you would be wise to start adapting your systems to track sales by state and, if appropriate, by local jurisdiction.
Do you think the recent Supreme Court ruling is fair?
Bruce – Your Host at The Tax Nook
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