Aside from the obvious convenience and choice that e-commerce has always offered, an often overlooked factor in its success in the US over the years has been the fact that sales tax did not have to be collected by a business if they didn’t have a physical presence in the state that they are selling within.
In effect this has led to the majority of online sales being tax-free – great for consumers and great for companies as they did not have to navigate state and local tax codes.
The reason for this can be traced back way back to 1992 where the court ruled in Quill Corporation v North Dakota that the Constitution bars states from requiring businesses to collect sales tax unless they have a substantial connection to the state.
Yesterday though the Supreme court effectively overturned this in South Dakota v Wayfair Inc.
The challenge to overturn Quill v. North Dakota was brought to the Supreme Court by South Dakota. South Dakota passed a law two years ago demanding that all retailers that, on an annual basis, have more than $100,000 in annual sales or engage in 200 or more separate transactions, pay a 4.5 percent tax on all sales, “as if the seller had a physical presence in the State.” The state government then filed suit to have the case heard by higher courts, and the Supreme Court agreed to hear the argument earlier this year.
Writing for the majority in the 5-to-4 ruling, Justice Anthony M. Kennedy said the 1992 Quill decision caused states to lose annual tax revenues of up to $33 billion.
“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” he wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”
Marty Jackley, South Dakota’s attorney general, called Thursday’s ruling “a big win for South Dakota and Main Streets across America.” He said the decision could be particularly significant for rural areas where local businesses have been hit hard by competition from online retailers.
Mr. Jackley estimated that South Dakota would be able to begin collecting sales tax on online purchases in 30 to 90 days. Other states may be close behind: Anticipating Thursday’s ruling, several states, including North Dakota, have passed laws modeled on South Dakota’s.
On Thursday afternoon, President Trump tweeted: “Big Supreme Court win on internet sales tax – about time! Big victory for fairness and for our country. Great victory for consumers and retailers.”
The decision, however, will mean consumers may pay sales tax they hadn’t been previously –
Moreover, the decision will be a major burden for online businesses. They’ll need 3rd party tax data sources, they’ll need to change their online shopping carts to calculate and to display taxes, they’ll need to collect those taxes, they’ll need to report those sales and taxes to the state and local governments and finally they’ll need to send the state and local governments the taxes !
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