July 6, 2018
The Daily Business Review published an article written by Carl Richie discussing the consequences of online sales taxes and its impact on South Florida.
Thanks to a recent ruling by the U.S. Supreme Court, 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. However, that is far from the only consequence of the ruling.
On June 21, in a 5-4 decision, in the case of South Dakota v. Wayfair, the Supreme Court 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 Anthony 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.”
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 The court said that the 1992 decision was “outdated,” and in light of the current state of large scale online retail businesses, the law was, in effect, creating a tax shelter for online retailers, and encouraged them to avoid a physical presence in the states to avoid collecting sales tax. Furthermore, the rationale behind the original decision was that forcing mail order retailers to collect sales taxes, which differed from state to state, and often had additional municipal or city taxes within a given state, was unduly burdensome. However, that was before the introduction of software now currently available, that can easily calculate all taxes for the seller, simply based on the ship-to address.
What Is the Impact of the ‘Wayfair’ Ruling?
Consumers making purchases online will see an increase in purchases subject to sales tax. There will likely be a substantial increase in purchases subject to sales tax as more states, hungry for tax revenue, pass similar laws and regulations to South Dakota’s. Interestingly enough, though most taxpayers do not realize it, you have always been responsible for these taxes anyway. From a tax and accounting standpoint, state sales tax, actually falls under the category of “sales and use” taxes. As such, you actually have a legal obligation to report and pay use tax when sales tax isn’t collected on a sale. But, most people do not know this, and with the exception of very high ticket items such as cars or boats, failure to pay use tax is rarely enforced.
This ruling also means that internet retailers will see an increase in their responsibility for collecting sales tax. The South Dakota law, which the court upheld in overturning the original Quill decision, only applied to those businesses with more than $100,000 in sales, or at least 200 transactions in the state each year. Most states with sales taxes are likely now to jump on the economic nexus bandwagon, and pass provisions similar to South Dakota. States with such provisions right now include: Alabama, Georgia, Kentucky and New York. The point of setting threshold amounts is meant to protect small online businesses from the burden of having to collect tax. Small businesses with limited sales to a state with a provision like South Dakota will most likely not be affected, as their sales won’t exceed the threshold. However, when the ruling was announced, shares in major online retailers such as Amazon, Etsy, Overstock, and Wayfair, took a sudden drop.
Generally speaking, the ruling is a win for states, as they now stand to collect billions of dollars in sales tax revenue from which they were previously barred. However, Justice Kennedy, who wrote the majority decision, has also asked Congress to not see South Dakota v. Wayfair as a cure-all for the problem, and has urged lawmakers to consider new legislation that will ensure that retailers and consumers are also treated fairly in the new environment created by the ruling.
What Does This Mean for South Florida?
Florida-based online retailers that ship product throughout the United States will most likely see an increase in their sales tax collection responsibilities, depending on volume and the established threshold in the states they do business with.
In addition, Florida is a state that relies heavily on sales tax revenue. Therefore, it is likely that Florida will pass an economic nexus threshold rule like South Dakota in the very near future.
There are some who suggest that the new ruling could be a boon to local “mom and pop” retailers, as increased sales tax for online purchases could drive people back to shopping at local brick and mortar stores, that they had been avoiding to save money on sales tax by shopping online. Of course, that remains to be seen.
Click here to read the article on The Daily Business Review.