What Online Businesses Need to Know About the SCOTUS Sales Tax Case

The Supreme Court is set to take on a case that could upend internet sales tax law. South Dakota is seeking to end the physical presence test and requires most online retailers to collect sales taxes.

What’s the Current Law?

Currently, states may only force online retailers to collect sales tax on behalf of that state if they have a physical presence in that state. Although states can and usually do require their residents to pay an equivalent use tax when a seller doesn’t collect sales tax, residents rarely report online purchases.

Bricks-and-mortar retailers have argued that this gives out-of-state online retailers an unfair advantage as online sales effectively become tax-free. States are also facing lost tax revenues as online sales increase.

What Is South Dakota Trying to Change?

In 2016, South Dakota passed a law requiring online retailers with over $100,000 or 200 transactions in sales to South Dakota residents to collect South Dakota sales tax. The state knew that this law went against the 1992 U.S. Supreme Court case Quill v. North Dakota that established the physical presence test. Its goal was to have the Court revisit this issue.

South Dakota is arguing that the Quill case doesn’t reflect the reality of modern commerce. Quill established the physical presence test in response to states trying to impose a sales tax on mail order catalog sales. At the time, catalog sales accounted for about $180 billion per year in revenue in contrast to today’s over $3 trillion in online sales. In past cases, some Supreme Court justices have hinted both that they disagreed with how Quill was decided and that it has created a huge revenue shortfall for states.

What Are Online Retailers Saying?

Wayfair and other major online retailers are arguing to keep the current law in place. They say that having to track a patchwork of not just state but local sales taxes imposes an unreasonable burden.

One notable exception is Amazon, whose large network of warehouses has forced it to start collecting sales tax in most states. Amazon is pushing a nationalized approach to sales taxes that eases the burden of having to track state and local laws.

What’s Happening in the Case?

Oral arguments were set for the week of Monday, April 17, 2018. The Supreme Court typically announces its decisions in May or June.

If the Court rules in favor of South Dakota, online retailers can expect other states to pass similar laws. If not, things will stay the same for now, but states will likely continue seeking to find ways to tax online sales.

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