U.S. Supreme Court Upends Internet Sales Taxes
July 12, 2018
Prior to June 21, 2018, internet sales were largely free of sales tax. All that changed when the U.S. Supreme Court issued its ruling in South Dakota v. Wayfair, Inc. et al. The decision reversed the long-established “physical presence” rule for the collection of sales tax on goods and services made online or through mail order. The “physical presence” rule originated with a Court ruling in 1992 in Quill Corp. v. North Dakota, where North Dakota was prohibited from mandating out-of-state retailers and service providers with no physical presence in that state to collect and remit sales tax on all goods and services purchased online or through mail order and delivered to in-state consumers.
South Dakota, like all states, became concerned with the measurable loss of tax revenue, between $48 to $58 million annually, and enacted a law that it believed worked around Quill: all out-of-state retailers and service providers who, annually, (1) delivered more than $100,000 of goods or services into the state, or (2) engaged in 200 or more separate transactions within the state were required to remit sales tax. Knowing that such a law might bring a challenge, South Dakota filed suit against three of the four largest online retailers delivering out-of-state goods into the area: Wayfair, Overstock, and Newegg (the fourth retailer complied with the law and was excluded from the lawsuit).
Ohio struggles with similar concerns about sales tax by out-of-state online retailers. According to a Columbus Dispatch article earlier this year, studies from several years ago estimated Ohio’s losses of tax revenue between $200 and $400 million annually. Unlike South Dakota, Ohio resisted the urge to again target out-of-state retailers, instead mandating that Ohio citizens who purchase goods and services online from out-of-state businesses voluntarily remit use tax as part of their income tax filing. Not surprisingly, Ohioans’ voluntary disclosure of online suppliers only shows $4.8 million in taxes on untaxed purchases remitted in 2015. That is the tip of the sales tax iceberg.
What implications does South Dakota v. Wayfair, Inc. et al. hold for Ohio? The details are difficult to say, but in general this decision changes the sales tax landscape. A shift in the burden of remittance of tax from in-state consumers to out-of-state businesses will only occur through legislation. Given that the lame duck period for the Ohio General Assembly is fast approaching, it is unlikely the legislature will take up this issue before next year. However, given the large gap in tax revenue that could be earned from businesses remitting sales tax over individual Ohioans remitting use tax, it is merely a matter of time before Ohio changes its laws.
For online retailers, there is a significant risk that multiple jurisdictions, be they states, counties, or cities, will ask for sales tax remittances and reports. For small retailers or hobbyists who sell online, this burden can quickly become onerous. Changes in procedure for online marketplaces could possibly alleviate this burden. For example, for all orders shipped to Washington state, Etsy automatically calculates the sales tax, adds the tax into the payment, and remits the tax to the state, charging the retailer a fee for the processing.
With many possibilities in this area, for now, we know only that the future of sales tax on internet sales will change.