Updated April 17, 2018: Cathie Stanton, National Leader of State and Local Tax (SALT) Services at Cherry Bekaert, livestreamed her take on today’s oral arguments for the members of our Sales Tax for eCommerce Sellers Facebook group. Here are her first thoughts:
A landmark sales tax case, South Dakota v. Wayfair will get it’s day in the Supreme Court today at 10am ET, with the Justices’ decision forthcoming this June. Depending on how the high court decides, this could mean big changes in the way that online sellers are required to collect sales tax.
Why is the Supreme Court’s decision to hear this case significant?
Back in 2016, South Dakota passed a law requiring any online seller – whether they have nexus in the state or not – to collect South Dakota sales tax if they either made more than $100,000 in gross sales in the state in a calendar year, or made over 200 individual sales in the state each year. They followed this action up by suing Wayfair, Newegg and other eCommerce retailers who currently did not collect South Dakota sales tax.
This move was designed to provoke a legal battle, and wind it’s way through the court system all the way up to the Supreme Court, where the nine Justices could have a chance to revisit the current sales tax precedent set by the Quill v. North Dakota case. You can read more about this in “The New South Dakota Sales Tax Law, Explained.”
Now, the Supreme Court will hear arguments in the case, meaning that depending on how the Justices rule, we may see huge changes to sales tax in the United States.
What does this mean for online sellers?
If the court rules in favor of South Dakota
If the Supreme Court decides in favor of South Dakota, states will no longer be bound by the concept of sales tax nexus. Instead, they will be able to require that any online seller make a sale into their state collect sales tax. This would add a significant sales tax compliance burden for online businesses.
That would not happen over night, and not all online sellers would suffer. I theorize that states would pass “economic nexus” laws similar to South Dakota’s (and many already have), though with differing criteria for when online sellers are required to collect sales tax. For example, an aggressive state might pass a law stating that any seller who makes more than $10,000 in gross sales in the state is required to collect sales tax from all buyers in that state. A less aggressive state may set the threshold higher, such as at $250,000 in sales. In this scenario, while smaller online sellers would still be subject to collect sales tax in the states where they have sales tax nexus, they wouldn’t be required to suddenly begin collecting sales tax in all forty-six U.S. states (and D.C.) with a sales tax. Still, this could create quite a bit of new complexity for online businesses.
At least some lawmakers seem to understand that. Representative Kristi Noem (R-SD) was quoted in The Hill: “If the Supreme Court rules in South Dakota’s favor, it could become a marketplace free-for-all. A South Dakota small business, for instance, could be forced to comply with 1,000 different tax structures nationwide without the tools necessary to do so.”
Noem is the sponsor of H.R. 2193, the Remote Transaction Parity Act, a federal law that backers claim will make sales tax fair for both businesses and state governments.
In a press release, Matthew Shay, President and CEO of the National Retail Federation, a persistent internet sales tax proponent, echoed Noem. “Congress should not sit on the sidelines as the Supreme Court considers this case. It’s time to pass legislation to settle this critical issue once and for all. Even if the court rules in favor of a modern sales tax policy, legislation will still be needed to spell out how that would work.”
If the court rules against South Dakota
On the other hand, if the court does not rule in favor of South Dakota, the status quo would prevail – for now. Congress is still tackling the idea of a federal internet sales tax, so even should this push by South Dakota fail, this is likely not the last we’ve heard regarding compelling online sellers to collect sales tax in more states.
We are following this case closely, though it will be June before the Supreme Court decision is announced. In the meantime, we’ll be keeping a close eye on Congress as they cast their gazes toward internet sales tax, too. Do you have questions or something to say about the South Dakota eCommerce sales tax Supreme Court case? Start the conversation in the comments!