For years, many shoppers in the United States had a choice: buy from an in-state retailer and pay state taxes on their purchases, or buy from an e-retailer based outside the state and pay no taxes.
The prevailing law of the land was that retailers were required to have a physical presence in the state before a state could require the seller to collect sales tax from that state’s customers.
Given the choice between a pair of $100 shoes, plus tax, versus $100 shoes sans tax, the decision was probably pretty easy.
But that commercial construct changed on Thursday when the U.S. Supreme Court, in a 5–4 decision, held that states can require online retailers that don’t have a physical presence in those states to collect and remit sales tax to the state, as long as the retailer has a “substantial nexus” with the state.
The decision in South Dakota v. Wayfair, Inc., No. 17-494 (U.S. 6/21/18), overturned the Supreme Court precedents in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967).
The opportunity for states to collect sales tax related to such buying is likely to change dramatically, creating ramifications for consumers, brick-and-mortar retailers, online retailers, accountants, and state balance sheets — in addition to technology companies that develop accounting software.
States will now be able to collect billions in revenue that previously had eluded them. The U.S. Government Accountability Office estimated that state and local governments could have gained up to $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers.
“This is a big win for states,” David Adkins, CEO of the Council of State Governments, said in a statement. The organization filed an amicus brief in 2014 critiquing Quill. “The current tax law was out of step with how commerce is conducted today due to increased sales in the online retail marketplace since the Quill case was decided.”
Thursday’s decision doesn’t require states to collect tax from out-of-state retailers, but many are expected to take advantage of the potential windfall. To make out-of-state retailers subject to sales tax collection rules, many states will have to amend their sales tax laws, and the requirements, including their definition of “substantial nexus,” will vary from state to state. The Supreme Court approved South Dakota’s threshold of $100,000 in in-state sales or 200 transactions as meeting the substantial nexus requirement but did not indicate whether lower thresholds would be permissible.
Consumers, including the many who have essentially received the benefit of “tax free” shopping, might now be expected to pay more for products online. While buying habits might be difficult to change, costs are likely to rise.
Some businesses that did not collect and remit sales tax on purchases from out-of-state buyers may soon have to comply with tax laws in the 45 states that collect sales taxes.
And for brick-and-mortar businesses, especially small ones that rely on local customers, there could be a sense of relief. Those businesses’ prices might still be compared right in the store by a customer on a smartphone, but they won’t have to worry about the sales tax disadvantage they previously faced.
“This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store, or both,” Deborah White, general counsel for the Retail Industry Leaders Association, said in a statement.
Amy Cyboron, CPA, CGMA, who co-owns Geared4Sports in Broken Bow, Neb., thinks the ruling will help the company in the long run.
Nebraska’s state sales tax of 5.5%, plus a 1.5% local sales tax in Broken Bow, is significant for someone considering a purchase, especially a larger one, she said.
In an environment when all potential sellers are charging sales tax, “it can make a difference and maybe drive somebody into the store,” Cyboron said.
Cyboron, who opened the store with her husband, Scott, in November 2016, said the store has a website with its products listed but that it has yet to open the “shopping cart” functionality on the site. When it does, she is confident that the point-of-sale system’s sales tax component should make compliance with Nebraska’s rules fairly smooth. She does not expect the site to have many out-of-state sales.
Companies that rely heavily on web-based sales from multiple states will “absolutely have more complexity,” Cyboron said.
And that could be a good thing for companies such as Amazon and Etsy, whose platforms enable third-party sellers to sell goods through their sites in a way that simplifies the collection of state sales taxes.
Also standing to benefit: companies that make accounting software. The stock price of Avalara, a sales tax automation software company that went public earlier this month, rose more than 13% in Thursday trading.
For businesses already collecting sales tax on web-based sales, little may change.
Online retailer Wayfair, a party to the suit decided by the Supreme Court, said Thursday that it welcomed the clarity provided by the court’s decision, but that it doesn’t expect the decision to make a big difference to its business.
The company, which said it collects and remits sales tax on about 80% of its orders in the United States, expects that number to grow as the company expands. “We do not expect today’s decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax,” the company said in a statement.
Overstock.com and Newegg, fellow online retailers, were also respondents in the South Dakota suit.
— Neil Amato (Neil.Amato@aicpa-cima.com) is a JofA senior editor.