State and Local Taxes (“SALT”) are getting a little shake up thanks to a new Supreme Court decision that, according to the headlines, is going to change the landscape of online sales. Take those headlines with a grain of SALT.
On June 21, the Supreme Court, in South Dakota v. Wayfair, overruled National Bellas Hess v. Illinois and Quill Corp. v. North Dakota. You’d be forgiven for not recognizing those case names (tax cases seldom make memorable headlines), but they each impact businesses and consumers on a daily basis.
Have you ever ordered something online and not had to pay sales tax? Say thanks to Quill, in which the Supreme Court held that in order for a state to require a merchant to collect sales tax, the merchant must have a physical presence in the state. This is called “nexus”, which enables a state to impose the duty to collect sales tax under the Constitution. Under Quill, the physical presence within the state does not have to be extensive, but it had to be more than just the company’s goods passing through the state. A single employee in the state was all it took to establish nexus.
When Quill was decided in 1992, mail order (remember when you had to order things from catalogs?) sales totaled $180 billion (about $327 billion in 2018 dollars) and less than 2% of Americans had internet access. Today, e-commerce sales are estimated to be around $453.5 billion with over 90% of Americans having internet access.
In Wayfair, South Dakota had enacted a law, which only applied prospectively, that required out of state retailers who sold more than $100,000 worth of goods or engaged in 200 or more separate transactions in South Dakota to collect sales tax. This concept is known as an “economic nexus.” South Dakota’s law was in direct conflict with Quill, as the South Dakota law required no physical presence.
You may be asking yourself at this point, “So what? How does this affect me as a business owner or a consumer?” It affects you, the business owner or consumer, like most tax laws do, in the wallet. For consumers, it’s pretty straight forward, sales tax from online purchases will be more of the rule than the exception. For businesses though, it’s more of an indirect cost.
As any business owner knows, in the US, a business doesn’t pay sales tax on the items it sells. The business collects the sales tax from consumers and remits it to the state (don’t forget to do that part; New York in particular is very tough on this point, imposing personal liability on business owners for unpaid sales tax).
So, how might this change result in increased costs for businesses? In New York alone, there are 62 counties. In addition to the 4% state sales tax rate, each county can impose its own tax rate up to 3%. However, because every rule has exceptions, New York has allowed more than forty waivers to allow municipalities to impose sales taxes in excess of 3%. That means, just for sales into New York, should New York adopt a sales tax statute requiring out of state merchants to collect sales tax, the merchant would have to account for 62 different potential sales tax rates. When thinking about nationwide sales, compliance will be complicated.
Additionally, I will quickly note, since 2000, there has been an effort, called the Streamlined Sales Tax Project, to have states utilize the Streamlined Sales and Use Tax Agreement (“SSUTA”), in order to assist out of state sellers in complying with the collection of sales tax. Twenty four states have signed on to SSUTA, but the largest states, California, New York, Florida, Texas and Pennsylvania, which make up 40% of the US population, have not signed on to SSUTA. The Supreme Court in Wayfair noted, South Dakota was a member of SSUTA and its membership was a factor that supported the constitutionality of the sales tax statute.
Companies collecting sales tax from a state in which they have no physical presence is nothing new. Amazon has been capitalizing on this complexity for a few years now. Amazon used to challenge state sales tax in many states where they did not have a physical presence. After losing a number of these cases, they saw revenue potential and now offer a service to help sellers comply with the collection of sales tax, for an additional cost, of course.
Undoubtedly, enterprising people will pump out software designed to help businesses comply with the collection of the thousands of different sales taxes.
Though it may seem clear at first glance, we do not know the outer bounds of the Wayfair decision. The Supreme Court did not say that any imposition of the requirement to collect sales tax is constitutional; there must still be a “nexus” with the taxing state. As stated above, South Dakota’s statute required $100,000 worth of goods sold into the state or engage in 200 or more transactions before the merchant was required to collect sales tax. What happens if a state enacts a law that mandates any sale into the state obligates the merchant to collect tax? What about ten items? What about $20,000 worth of goods or services? What threshold is constitutionally acceptable? What if a state is not a member of SSUTA? What happens if a sales tax statute applies retroactively? We don’t know.
To come full circle, we need to take Wayfair with a grain of SALT. The full impact of the decision and how states will respond is unknown. If I had to guess states’ responses, it would be in favor of increasing tax revenue by enacting statutes similar to South Dakota’s law. Some states have statutes that will automatically adjust to the new constitutional standards, referred to as “sleeper laws”; however, most states will need to amend their sales tax laws to reflect the change.
What can a business do to prepare and what must be done right now? To prepare, businesses who sell into states in which they have no physical presence should keep apprised of those states’ sales tax laws and seek out professional guidance. As for right now, nothing has changed (except if you sell into South Dakota or a state with a sleeper law), but you can be positive that states will begin to enact these types of sales tax regimes because of plummeting sales tax revenues due to online sales. Forthcoming software and services to help businesses comply with the complexity of thousands of different sales tax regimes will be worth their SALT.
Jason W. Klimek is an associate and a member of Boylan Code’s Corporate Practice and Real Estate Groups. He concentrates his practice in business planning and development, tax planning, advising and financing.
To read the published article in the Daily Record, click here.