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How the Internet Sales Tax Brings E-Commerce Into the 21st Century

Dorothy Chong | July 23, 2018

As a new reality dawns, learn what’s coming with the Supreme Court ruling

Half a century ago, the Supreme Court decided that U.S. states would not be required to collect sales tax on out-of-state purchases unless the business had a brick-and-mortar presence or “nexus” in the said state. In 1992, the issue was revisited in light of growing catalog sales. The existing law was reaffirmed, which came to be referred to as the Quill decision. This was two years before Jeff Bezos would start selling books online out of his Seattle garage and three years before Pierre Omidyar sold a broken laser pointer on AuctionWeb for $14.83 for fun. Today, the world knows both men’s creations as Amazon and eBay respectively. Fast forward 26 years to 2017, where e-commerce made up 13 percent of total retail sales and 49 percent of overall growth. Statistics show, last year,  consumers spent more than $453 billion in online retail purchases, compared to $390 billion in 2016. While this is great news for e-retailers, it is estimated that the states lose up to $33 billion annually due to the nexus rule. This, however, has changed.  

Who is affected by the sales tax ruling?

On June 21, 2018, the U.S. Supreme Court ruled states can now collect sales tax on online purchases made by consumers in that state. The premise of the South Dakota v. Wayfair ruling states internet retailers have had the upper hand over mom-and-pop retailers since online and out-of-state sellers do not collect sales tax. So what does that look like in real life? Take, for example, this 21-inch table lamp available on the Wayfair site. It is has a price tag of $29.99. For a buyer from Boise, Idaho, where the state sales tax is not historically required and where Wayfair has no physical presence, the only additional cost would be shipping. For a buyer in Boston, MA, however, where Wayfair does have a physical office, the state sales tax is added. $1.87 may not feel like much until you multiply it by the 96 percent of Americans who shop online.State governments have also been long aware of the millions lost in sales tax from online purchases. Since the Internet was opened for commercial use in 1991, online retailers have benefitted from the physical presence rule and the perceived price advantage shown above. It is hoped that by requiring sales tax on internet purchases across the board, both online and physical retailers can compete on a more level playing field. It is important to note the South Dakota ruling is only applicable to sellers who deliver more than $100,000 in goods or services in the state you’re purchasing from or engage 200 or more separate transactions for the delivery of goods and services in your state. This volume is used to establish substantial nexus, or the lack of, and can shield smaller-scale online operations from bearing the increased compliance costs. It also remains to be seen how the threshold will vary or play out in other states.  

When and where else will the ruling come into effect?

It is important to note that this is a work in progress, meaning that it’s subject to further litigation and revision. Joseph Bishop-Henchman is the Executive Vice President of Tax Foundation, an independent tax policy nonprofit. He wrote, “Congress may act to establish a minimum standard for states that wish to collect sales tax on interstate sales. A federal standard would create certainty for sellers and consumers and ensure that every state meets certain simplification guidelines. Until then, we’ll likely see more states seek the same authority as South Dakota, with some encountering legal challenges.”Sixteen states have since passed some form of online sales tax legislation, with additional states moving to pass similar laws of their own. Georgia, Tennessee, Indiana, Wyoming, Colorado, Alabama, Massachusetts, North Dakota, and South Dakota had existing online sales tax laws but were not enforceable due to the Quill decision. Meanwhile, Illinois, Iowa, Connecticut, Hawaii, Kentucky, and Vermont have moved to enact laws to emulate South Dakota. You may not see your state enact a law right away, but that doesn’t mean the law won’t affect you in the future. 

A new old reality

In his majority opinion, Justice Anthony Kennedy wrote, “The Quill Court did not have before it the present realities of the interstate marketplace, where the internet’s prevalence and power have changed the dynamics of the national economy.” While price is a crucial factor in business, it is not the only advantage. Increasingly, selection, speedy delivery, customer support, and experience have been proven to be what consumers value more, with price dropping off in the background. It is unlikely that the Supreme Court ruling will slow down e-commerce. Rather, with the supposed “leveled playing field,” all players will simply have to try harder to win over the consumers’ hearts and pockets.
Disclaimer: This material has been prepared for informational purposes only and was accurate at the time of publication. It is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
A little about Dorothy Chong

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