State Changes to Follow Sales Tax Ruling
You may have heard recently that the U.S. Supreme Court reached a decision that affects how states can levy sales taxes on purchases made from out-of-state online retailers. In South Dakota v. Wayfair, justices ruled by a 5-4 vote that the State of South Dakota correctly implemented its sales tax on these goods.
But what does the Wayfair decision mean for Nebraska and the rest of the country?
First, sales tax on internet sales is not a new tax. In theory, taxpayers are supposed to pay use tax on any taxable item for which the sales tax isn’t collected at the point of sale, even in another state. In Nebraska, this option appears on annual income tax returns but is rarely used.
Currently, 31 states attempt to levy sales tax when online businesses complete a sale due to traffic directed from an in-state business, when businesses reach a certain threshold in revenue sales, or when businesses have data centers located in-state.
Prior to Wayfair, however, states lacked a clear way to collect tax from non-resident retailers without appearing to interfere with commerce in other states.
This was due to a 1992 court ruling on a similar case, North Dakota v. Quill, in which the court found that a business with no physical presence in the purchasing state is exempt from collecting the state’s sales and use taxes. At that time, the business in question sold computer software through catalogs.
In an attempt to clarify the issue, South Dakota passed a tax reform bill in 2016 which required all retailers with at least 200 transactions or $100,000 in revenue from sales in the state to collect South Dakota sales tax, whether or not the business has a physical presence within the state.
The new ruling in Wayfair explicitly overturns the older Quill precedent in favor of South Dakota’s law, but importantly, it does not give states unlimited legal authority in how the tax may be imposed. Joseph Bishop-Henchman from the Tax Foundation states, “This ruling is not a blank check for states. The Court specifically observed that South Dakota's law, and its tax laws generally, minimize the burden on interstate commerce. Other states should craft their laws accordingly.”
Justice Kennedy argued that because South Dakota is a member of the Streamlined Sales and Use Tax Agreement, the state would pay for the costs of software needed to collect sales taxes. Businesses that use this software would be immune from an audit, which would drastically limit the burdens placed on online retailers.
This means other states can safely consider South Dakota’s tax law as a model. Passing laws that would be more complex, such as not providing state software for calculating the tax due, would be a risky decision, since it might have the potential to be struck down by courts.
Furthermore, future lawmaking for taxing interstate internet sales still remains up to Congress, since the Commerce Clause is a power of the legislative branch in Article 1 Section 8 of the Constitution. However, of the two bills introduced in Congress on the issue, one passed only the Senate before stalling in the House, and the other was not acted upon.
Ultimately, the Wayfair decision is a win for brick-and-mortar businesses who struggle to compete with large online retailers and states that have argued extensively that they are missing out on significant sums of revenue. But, there are some losers in this decision. For example, smaller retailers who sell online may now have an additional compliance cost to collect sales taxes for states that tax online purchases.
In the coming weeks, we will likely see other states decide to follow South Dakota's lead in how it imposes a sales tax on out-of-state internet sales and greater debate on how state revenues and priorities might be impacted as a result.