Consumers who are planning on ordering a sofa from Overstock, or a new patio set from Wayfair, may end up paying sales tax on these purchases. In a 5-4 decision, in the case of South Dakota v. Wayfair, the Supreme Court has ruled to overturn a previous decision that had barred states from forcing online retailers from collecting state sales tax, unless the retailer had an actual physical presence in the state.
The original 1992 case, Quill v. North Dakota, established the so called “physical presence test” for sales and use tax nexus. However, that was long before the exponential growth in e-commerce and online sales we have experienced since then. As Justice Kennedy cited in drafting the majority opinion, “In 1992, mail-order sales in the United States totaled $180 billion. Last year, e-commerce retail sales alone were estimated at $453.5 billion.”
Ever since the original Quill decision and this enormous growth in online retail, states have been clamoring for ways to collect sales tax revenue from online retailers who ship goods into their states, but did not have a physical presence there.
The End of the Physical Presence Test
The Wayfair decision spells the end of the physical presence test. The Court said that the 1992 decision was “outdated,” and in light of the current state of large scale online retail businesses, the law created a tax shelter for online retailers, and encouraged them to avoid a physical presence in the states to avoid collecting sales tax. “The Internet’s prevalence and power have changed the dynamics of the national economy,” Justice Kennedy wrote. “The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes.”
The South Dakota law, which the court ruled against in the original decision, only applied to those businesses with more than $100,000 in sales, or at least 200 transactions, in the state each year. There are currently 31 states that already do levy some kind of sales tax on online retailers. Now, with the overturn of Quill, it is likely that all states will now enact some kind of legislation to impose sales taxes on online retailers. Doing so may help local economies by not only filling the state’s coffers, but, it may drive people back to shopping at local brick and mortar retailers, that they had been avoiding to save money on sales tax by shopping online.
How MBAF Can Help
In light of the Court’s decision, if you are a consumer making purchases online, you will likely be paying more for such transactions. If you are an online retailer and are not sure if you need to start collecting sales taxes, contact us. Our team of experts can help you evaluate your particular circumstances, and make sure you are in complete compliance regarding the collection of state sales taxes, now that Quill has been overturned, and the Wayfair decision is the prevailing standard.
At MBAF we are at the forefront of all Sales Tax changes and challenges. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting specialists, or call us at 1-800-239-1474.