On June 21, 2018, the U.S. Supreme Court, in a 5-4 decision, changed a position it had held for decades. Back in the early 90’s, the Court, in a case called Quill Corp. v. North Dakota, said states couldn’t require merchants to collect sales taxes unless they had a physical presence within their borders. Now, the Supreme Court has reversed its position, saying that states can require online retailers to collect sales taxes on what’s sold within their states.
State Sales Tax Rules
The case, called South Dakota v. Wayfair, Inc., focused specifically on South Dakota’s law requiring online retailers to collect a 4.5% sales tax on transactions within its state if their sales are more than $100,000 annually or if they had 200 or more transactions.
It’s likely that many other states will follow suit and enact their own sales tax rules (they don’t have to but they could). Why? Because big revenue ($13 billion or more according to estimates from the U.S. Government Accountability Office) is involved.
It’s expected that the new laws will have:
- A flat sales tax rate for online sales, even though there may be different rates within a state due to local sales taxes. After all, there are an estimated 10,000 different sales tax jurisdictions within the U.S. after taking local sales taxes into account.
- An exemption for small retailers, probably along the lines of South Dakota’s $100,000 sales/200 transactions rule. The reason: The Court said South Dakota needed a “substantial nexus” (connection) to sustain its position, which it did. And the court didn’t say that less revenue or fewer sales would amount to a substantial nexus.
Note: Connecticut, Hawaii, Kentucky, and North Dakota have new online sales taxes in effect as of July 1, 2018, although the laws may be changed slightly in light of the Court’s decision.
My Take
For years, Congress has been trying to level the playing field between bricks-and-mortar stores (who have always been required to collect sales tax on their transactions) with online retailers (who usually have not). So the Court’s decision may have the impact of making local retailers more attractive to consumers than they have been to date. After all, consumers will pay the same sales tax in their local shops as they will online (assuming that other states impose sales tax collection requirements on Internet-based sellers).
For online retailers seeking to simplify their sales tax responsibilities, there are already resources to help. For example, some online sales sites, such as Shopify, enable to you easily include sales tax in listings. Other options include:
