By a close 5-4 decision last week, the United States Supreme Court decided a case between plaintiff State of South Dakota and defendant Wayfair, Inc. et. al.to resolve a dispute about the collection of state sales taxes. The Supreme Court narrowly ruled in favour of the State of South Dakota that it may impose state sales taxes on e-commerce sales to consumers in the state, with certain restrictions.
The state of South Dakota sought to impose sales taxes on out of state e-commerce businesses that have greater than $100,000 in sales or greater than 200 transactions in the state annually. Most of the large internet retailers like Amazon, Wayfair, Overstock, Newegg and others meet the criteria, although Amazon was not a defendant in the case. Many small businesses with an online presence do not meet the sales or transactions criteria and are not subject to the collection of state taxes currently. This decision has far-reaching implications for both online retailers and brick and mortar retailers alike in other states that collect state sales taxes.
Prior to the recent Supreme Court decision, South Dakota’s legislature had enacted a law requiring out-of-state businesses to collect and remit sales tax “as if the seller had a physical presence in the State.” This set the stage for the Supreme Court to review the case.
Prior to the Supreme Court decision, 10 states had already enacted laws to require out of state businesses that are selling in those states to report unpaid sales taxes to the state. More are likely to follow suit as this decision will help generate tax revenue for many states.
Here is a link to review the Supreme Court decision:
Here is another link to review the current state sales tax in your state:
As discussed in the Supreme Court decision, the US Dept. of Commerce reported that e-commerce sales have grown from 0.8% to 8.9% of total retail sales in the United States since tracking began in Q4 2000. Clearly, times have changed. Almost everyone I know including myself is purchasing at least a portion of their items online. Additionally, the US Dept. of Commerce reported that e-commerce sales have grown at 4x the rate of total retail sales last year.
According to court documents, in 1992 states were missing out on between $694 and $3 billion in state sales tax revenues. Today, those figures have ballooned to between $8 billion and $33 billion annually.
The good news is that several online retailers already require state sales taxes to be paid at the time of the transaction, most notably Amazon, excluding Amazon’s third-party sales. There are reports that most of the top 100 internet retailers are collecting at least some of the state taxes owed in each state, although I have not been able to find a credible source of that data or specific figures to report.
This Supreme Court decision is particularly important for you because online purchases from out of state businesses may have created a significant tax advantage vs. purchasing from a physical retailer in your state. That tax shelter advantage may be disappearing as states continue to enact laws requiring sales taxes to be paid on e-commerce transactions from out of state businesses.
As you may expect, politicians from both sides of the aisle are already taking sides on this issue and it is possible that legislation could take shape sometime next year to address the grievances of state and online retailers. Thank you for reading!
Brent Bankosky, MS, MBA