17 May 2018 A New Supreme Court Ruling on State Sales Tax Collection Could Harm Small Businesses
This year the United States Supreme Court will be deciding a landmark case that could change the world of online shopping with the collection of taxes by online retailers. Until now, there has been a mishmash of legal rules and their application by the millions of companies that currently do business online, buying and selling goods. The attorney general of South Dakota is asking the Court to overturn decades of precedent and allow states to collect taxes from online purchases.
This case has excited much comment from all sides of the issue. Obviously, small businesses in California and elsewhere will be impacted regardless of the Courts decision. While it could improve the finances of some states, it could also do much to damage a fledgling economy seeking to outpace global events and grow.
History of the Rule
There are many reasons this question is now before the Court. Primarily is the choice by Congress not to pass any legislation that authorizes states to collect online sales taxes from businesses that sell from one state and then ship to another. In the decades since online commerce has become the norm, Congress has failed to pass any laws or regulations that authorize states to collect such taxes.
Another reason is that of the Court’s precedent. Going back to the late 1960s, the Court addressed similar questions brought forth by states, concerning mail-order catalogs. In those days, many large national companies sent mail-order catalogs to consumers, with photos of goods and advertisements trying to get people to make purchases nationwide. An outdated concept to most in modern society. Those catalogs were effective sales tools, and many people would send in orders with checks to purchase the goods they saw. Because the company was in a different state, it meant that the company did not have to collect sales tax.
The Supreme Court confirmed this by establishing the physical presence rule. In another case, the Supreme Court further ruled that a state was not authorized to make and enforce state tax collection laws against companies outside their state, under the dormant commerce clause.
Staying Current with the Law
Now the Supreme Court has been urged to overturn their prior rulings, in light of the changes e-commerce has undergone over the past two decades. Furthermore, given the fact that Congress has failed to legislate in this arena, states are putting the proverbial ball in the Supreme Court to allow them to step up and implement change by enacting so called “Amazon laws.”
Generally, “Amazon laws” have replaced the physical presence rule with a nexus rule, or these laws have increased use tax reporting requirements requiring retailers to collect and pay customers’ use taxes.
South Dakota’s approach, which is at issue with the Supreme Court, requires retailers with a sufficient nexus to the state to collect sales taxes on online sales within the state. This would require sellers with gross revenue from the sale of goods or services into South Dakota exceeding $100,000 to collect sales taxes on all sales into South Dakota. This law would require sellers with 200 or more separate transactions within the state to collect sales taxes on all sales into South Dakota.
Multistate Tax Analysis
What does this mean for your company? Depending on how the Court rules regarding this issue, it could have widespread implications for your business. In a world in which the Court allows states to collect online sales taxes, it will require you to conform to and learn the tax codes of the 50 different states in order to stay compliant. While a big business may have the necessary auditing capabilities to track sales to all 50 states, this may be a prohibitive measure for a smaller start-up trying to get off the ground.
No matter what happens, at the Royse Law Firm we will stay current with the law and help advise your company on how to best proceed. As your company confronts new legal questions and challenges, contact us for helpDisclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.