Could E-Commerce Sales Tax Reform be Next?
Originally published on February 7, 2018
Updated on August 16th, 2022
2018 is shaping up to become the Year of Tax Reform.
After decades of ignoring sales tax cases, the U.S. Supreme Court has agreed to review the case of South Dakota v. Wayfair, Inc., which addresses the controversy surrounding whether states can collect sales taxes from purchases made from out-of-state vendors. The decision was made by the court on January 12, 2018, less than two weeks after the sweeping Tax Cuts & Jobs Act took effect.
Currently, if a company sells tangible property to a party in another state, the company is not required to collect sales tax in that state unless it has a physical presence (or substantial nexus) there. This precedent was set by the Supreme Court in the Quill vs. North Dakota case from 1992—an era in which the majority of sales transactions were still handled in person at brick-and-mortar businesses.
Due to the internet age and a thriving e-commerce environment, however, states have seen a sizeable decrease in sales tax revenue under these laws—by some estimates, $10-20 billion per year. As a result, many states have enacted regulation that is contrary to current law in anticipation of possible legal challenges to the Quill decision. This includes South Dakota, the plaintiff in this case (South Dakota does not have a state income tax and relies heavily on the collection of sales tax).
Congress has “kicked the can” on this tax reform issue for years. Several bills have been introduced to address it but have never gained much momentum. Some retailers who were spending millions in legal fees have started collecting sales tax in states in which physical nexus has not been established to avoid litigation from the states. Other retailers have tried to navigate the different rules enacted by over 9,500 sales tax jurisdictions (states, counties, cities and other local governments) in the United States.
What should we expect now?
It could take months for the Supreme Court to render a decision on this case. Based on statements from different members of the court, most industry leaders believe that some change will occur. If so, new questions will then arise. Will Congress be forced pass federal legislation? Will legislators continue to remain mute and allow the upcoming decision to stand? If Congress does not act, will we continue to have multiple state interpretations of the Supreme Court decision?
The impact on retailers of all sizes could be substantial, so this tax reform case will be monitored closely.
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