In a 5-4 decision, the U.S. Supreme Court yesterday overturned decades of legal precedent and opened the door for states to require online retailers (even with no physical presence within a state) to collect sales tax on sales in a state. The law of the land for many years has been that in order for a state to impose its tax on such sales, the retailer must have a substantial connection or physical presence in that state. The last time the Supreme Court ruled and upheld that position was in the 1992 Quill Corporation vs. North Dakota decision, which regarded mail order sales. This was well before the advancement of technology and the explosion of sales over the internet that we have witnessed over the years.
States have estimated that in recent years they have lost more than $30 billion annually in uncollected tax on such sales. Businesses have argued that having to comply with the complexity to keep up with the laws and compliance requirements of each state was an undue burden on business and could potentially negatively impact this growing part of our economy. Some businesses also realized the competitive disadvantage “brick and mortar” taxpayers have compared to online retailers who, to date, were not required to collect sales tax. This decision in many ways levels the playing field.
The big concern has been for small to medium online retailers who may not have the resources necessary to comply with these tax collection requirements in multiple states. While there will likely be some safe harbor rules exempting smaller online retailers from these requirements, it is possible that some businesses which do not fall within the safe harbor will have to make some tough decisions on whether to attempt to comply or simply not do business in the same way.
There are more than 30 states that have already passed requirements taxing internet sales and they are eager to implement and realize this lost tax revenue. With today’s ruling, these states will be making decisions on their specific laws and it will be interesting to see how they attempt to comply and impose these requirements.
The state and local tax group (SALT) here at Crosslin stands ready to assist you with complying to these new requirements as they become evident or any other state and local tax need you may have. Please contact SALT Director Mark Loftis (firstname.lastname@example.org or 615-320-5500) with any questions you may have. As always, we appreciate your business!