May 14, 2018

South Dakota v. Wayfair: Interpreting the future of e-commerce taxes

Online retailers have completely changed the way the American public purchases goods and services – and the country hasn’t quite figured out how to deal with the change. One area receiving particular attention in recent days is the subject of taxation for online retailers.

The U.S. Supreme Court recently heard arguments about how states should collect sales taxes from online retailers via the South Dakota v. Wayfair case.

For some background on this case, we need to go back to 1992, when Quill Corps. v. North Dakota set the precedent for this issue. This case reaffirmed the idea that a company must have a physical presence in a state in order for that state to require the company to collect sales taxes. For example, if an e-commerce company was based in Philadelphia and did not have a physical presence in any other state, the company would only be required to collect sales taxes in the state of Pennsylvania.

This physical presence mandate has served as the “minimum connection required” between a company and a state which gives the state the right to ask for something in return – like sales tax collection.  

However, the proliferation of e-commerce and online shopping has drastically changed the marketplace since then. This has left many government entities questioning whether Quill’s physical presence standard is still a good measure for the modern economy.

Several states have discussed or enacted laws that blatantly fly in the face of the Quill ruling. These laws state that online retailers that conduct a certain amount of transactions or sell a certain amount of merchandise in the state should be required to collect sales tax on those purchases. South Dakota’s law, for example, says that retailers that conduct over $100,000 in sales or over 200 separate transactions in South Dakota need to collect the state’s sales tax.

This led companies like Wayfair and Overstock.com to sue the state of South Dakota, which was ultimately heard by the U.S. Supreme Court in April 2018.

The real issue in this case is determining what level of connection is necessary to justify the burden states are placing on companies. It is not easy to collect and administer sales tax. If it were, states would collect the tax themselves.

Imagine having to collect sales tax in accordance with not just state laws, but local laws as well. 45 states in the U.S. impose a sales tax, and across those states there is somewhere north of 10,000 separate jurisdictions that all have different tax requirements. The hoops a small e-commerce company would have to jump through to figure out all the applicable rules and tax rates would be significant.

The Supreme Court will issue its final decision sometime this summer, but don’t bank on Quill getting overturned just yet. The line of questioning posed to both parties during the case leads us to believe a few justices are still on the fence. In the event that it is overturned, the next issue companies will face is whether the ruling should be applied retroactively. Most companies do not have the systems in place to track and calculate what would be owed to states prospectively, let alone retroactively; so this is something e-commerce companies should monitor closely.

No matter the outcome, the Wayfair case has the potential to be a tipping point for sales tax legislation. Online retailers should keep a close eye on this case and any subsequent legislation, and work closely with a tax professional to ensure their business is adequately prepared for any potential changes.

If you have any questions about how this case might impact your business, don’t hesitate to reach out to gchristian@cbiz.com.

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