by Chuck Rehdorf on 2018-01-26 2:39pm
Image credit: AYPO
The concept should be simple. If you’re selling products in a state you are not physically located in, you should have to charge for sales taxes in only that state, right? Or not. Since 1992, the rules surrounding doing e-business in a state and paying sales taxes in that state have been nothing if not convoluted. Now, as more than 20 years have passed, things have gotten much easier and simpler, right? Or not.
This year, the Supreme Court will hear a case that has the potential to reverse a ruling on out-of-state sellers that has, for the most part, stood for more than 25 years. In 1992, even before Amazon.com truly existed, the US Supreme Court ruled on a case known as Quill Corp. vs North Dakota. The High Court upheld a constitutional rule that barred states from requiring mail-order sellers to collect sales taxes if the vendors had no “physical presence” in that state.
Since then, the wrangling has never stopped. But that could be about to change. On January 12 of this year, the Supreme Court made the decision to hear the case of South Dakota vs Wayfair, Inc.
Here’s the issue the Court must decide- if a company does not actually have a “physical presence” in a state where they sell goods, should they be required to collect sales taxes for those goods? This is what is referred to as “nexus”.
On one hand, you have states like California, who claims to be losing as much as $2 billion annually in sales tax revenue. On the other hand, you have small and medium sized internet-based businesses claiming that it could place an unduly harsh requirement on them to collect sales taxes for more than 11,000 separate state and municipal entities.
Let’s go back and briefly take a look at the ruling that launched all this confusion and wrestling between businesses and states.
Image credit: AYPO
The first issue to remember about Quill, is that at the time of the original ruling, Quill was a mail-order catalogue company, and had no physical presence in the state, which at that time was the reason the court ruled that Quill did not have to pay taxes in the state. And the Supreme Court itself was not absolute about the ruling they made either. In the opinion of the court in 1992, Justice Stevens offered this invitation to Congress:
“This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.”
Current members of the Supreme Court have also recently opined that if the ruling from 1992 was flawed then, it is seriously behind the times (perhaps bordering on Stone Age) now. A couple years ago, Justice Anthony Kennedy said Quill was now “inflicting extreme harm and unfairness on the states.” Kennedy went on to express his opinion that because of the extreme changes in society and technology that are creating an interconnected economy, he felt it was “unwise to delay any longer a reconsideration of the court’s holding in Quill.”
Since Congress has not stepped in to do their job, where does that leave businesses who deal in internet sales of goods? Well, if the big guys are any indication of which way the wind is blowing, the small guys are about to take a big hit. On April 1, 2017, Amazon made the decision to start collecting sales taxes in all the states where it is required. As of that date, it began charging sales tax on deliveries in 45 states. Alaska, Delaware, Montana, New Hampshire and Oregon don’t have general state sales taxes. But whether the big guys do it or not, there are a lot of businesses and organizations out there who think that they’ll be the ones really left holding the bag.
From the States’ perspectives, this is a potential boon across the board. Nick Maduros, who is director for California Department of Tax and Fee Administration said, “The Supreme Court’s earlier view of taxable nexus no longer makes sense in today’s economy.” He went on to add, “The current interpretation places an unfair burden on those who pay their fair share of taxes and puts in-state retailers at a competitive disadvantage.” So says the fox who would be in charge of the henhouse.
Image credit: AYPO
On the other side there are those previously mentioned businesses who are already crying, “Unfair!” Since Quill, Congress has actually tried to agree on new laws that covered this, but failed to come together long enough to find a solution that might have been at least somewhat equitable to both sides. In the wake of nothing, small and medium sized internet businesses seem to run the risk of being squeezed out by what they call an undue burden for collecting those taxes. As said earlier, there are some 11,000 state and municipal agencies that will be demanding their individual slices of the pie. Against that stand companies whose response is that if they are forced to collect wildly varying sales taxes in all those jurisdictions, it would present an overly strenuous requirement on the businesses and would stifle competition, especially in those businesses trying to compete in more than one locality. As the states seem to be holding all the cards on this one, what is left to be done for the businesses? Well, even if the blow is on it’s way, there may be some ways soften it.
Image credit: AYPO
The first thing to remember is that at the heart of this argument is that concept of nexus. The easy way to think of a nexus is that it means a significant connection to a state. One of the criteria commonly used is whether an internet seller’s goods come from, or are stored in a specific state. This would create a nexus and subject the goods to the collection of state sales taxes. This would be one of the first things an internet seller would want to examine. Other factors can create a nexus as well, such as where a company’s home state is or where their personnel are located. In some places, even drop shipping or 3rd party affiliates can create or affect that nexus. So it really helps to know where a company stands.
Also, make absolutely sure to know the sales tax settings. If you are collecting the right amount right up front, you’re ahead of the game. It’s paramount that you make sure that all your shopping carts and marketplaces are using the right amounts. At the same time, it is essential to know the sales tax due dates for each of the tax jurisdictions in which you operate.
Something else to keep in mind is that in a number of states, taxes are collected on shipping charges as well.
Finally, an online seller might think about automating their sales tax compliance tasks. There are a number of different online solutions for sales tax compliance and it could save an online seller some headaches and trouble down the line.
As companies and individuals prepare for that special time of year again (Tax season, not Spring), it bears keeping in mind that those sellers and retailers out there doing business through the internet will need help navigating the minefield that our government has, yet again, left them in.