New online sales tax implications effective for some states, approaching for others

The Supreme Court ruled on June 21, 2018 that states can charge sales tax on online purchases, a decision that settled a longtime dispute and created a lineup of new ones. The case was South Dakota v. Wayfair, and it reversed a 1992 court decision, Quill Corp. v. North Dakota, that said a business couldn’t be forced by a state to collect and pay sales taxes unless the business had a physical presence within the state.

The in-state presence is called a "nexus”, or “sufficient physical presence.” It could include everything from a brick-and-mortar site to a one-time craft fair. Over time it became clear that some online businesses were quite literally, even if unintentionally, receiving a competitive advantage from the standpoint of not having to charge a sales tax as well as being incentivized to avoid establishing a physical presence in a state. As Justice Anthony Kennedy wrote in Wayfair,

Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.

That left out-of-state online businesses with the ability to undercut local businesses by the simple fact they didn’t have a physical presence. South Dakota took the case to court, going all the way to the high court, resulting in the Wayfair decision. States and businesses are scrambling to figure out what’s next.  

E-commerce in 2017 topped $450 billion. This figure will increase exponentially as millennials – who aren’t growing up in an exclusively brick-and-mortar store environment - more comfortably use computers and smartphones to order goods and services.

Indiana – one of the three states in which our firm has offices – has, like many other states, sought to deal with online sales taxes by redefining physical presence. The state’s Department of Revenue in July 2018 issued a Tax Bulletin headlined, “Indiana DOR prepares to move forward with out-of-state sales tax." The bulletin said,

Out-of-state retail merchants with annual gross revenues from Indiana sales exceeding $100,000, or 200 or more separate Indiana transactions, will need to register and remit Indiana sales tax.

The bulletin was based on a 2017 state law that established for businesses new sales tax responsibilities.  Indiana’s law was challenged by NetChoice and the American Catalog Mailers Association, which took the position that the law violated the Supreme Court’s 1992 Quill decision. The lawsuit was settled on Aug. 30, with the state agreeing to provide to the companies software to administer the sales tax and to pay the companies’ costs if there are software-related errors. With Wayfair the new standard, Indiana’s law is scheduled to go into effect Oct. 1.

The sales tax game has changed. But what don’t we know? Will states attempt to go back to a date-certain and attempt to collect sales taxes retroactively? For states it would be like finding a pot of gold, but a retroactive effort would face an avalanche of court challenges. The outcome could take years and could lead to additional questions.

Wayfair also means goods sold online out of Tennessee, Kentucky, Indiana, and other states will become more expensive as sales tax is added to the cost. But how much, and how soon?   

Online sellers not already collecting sales tax, particularly smaller ones, are faced with the administrative reality of adjusting to multiple jurisdictions’ differences in sales tax percentages and laws.

Any business engaged in online sales should consult the revenue departments in their states into which it’s selling; talk with tax advisors about Wayfair’s implications for their sales and business; and reach out to its trade associations to see what action, if any, is being proposed legislatively or legally within their states.

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Tagged Tax Deductions, Tax Tips, Tax, Sales Tax Deduction, Jimmy Talk, South Dakota v Wayfair