U.S. Supreme Court Issues Online Sales Tax Ruling Yet Questions Remain

In a highly-anticipated decision, the U.S. Supreme Court ruled Thursday that states may require online retailers to collect billions of dollars of sales tax revenue owed to them. In a 5 to 4 decision in South Dakota vs Wayfair, the Court overturned its 1992 decision in Quill vs. North Dakota that restricted states from collecting sales tax from retailers without a physical presence in those states. The Wayfair majority opined that the Quill decision was no longer relevant because of the changed nature of retail over the past quarter century.

Justice Anthony Kennedy, who authored the majority opinion stated that dramatic technological changes have made the Court’s previous ruling obsolete, and that it unfairly disadvantaged traditional brick and mortar stores. The Court did add more guidance when it stated that South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws would be.

Over 40 states and the Trump Administration asked the Supreme Court to overturn Quill. The state of South Dakota passed in a law in 2016 requiring retailers with more than $100,000 in annual sales or 200 transactions in the state to pay a 4.5 percent tax. Although technically consumers are required to pay sales and use taxes on all purchases, it is practically impossible to collect without the retailer applying it at the point of sale. Ohio and most other states have a place on their income tax returns to report sales tax not paid on legitimate purchases. Sadly, the compliance for this is very low.

More retailers are collecting, including 19 of the 20 largest, regardless of whether they have a physical presence in the state. According to briefs filed in the case, they include in that group already collecting are Amazon, Walmart, Target and Apple. There are three large retailers, Wayfair, Overstock and Newegg that do not, and South Dakota sued them for failing to collect taxes after the state’s law went into effect, causing the series of events leading to the decision by the Supreme Court.

Disagreeing with the majority decision was Chief Justice John G. Roberts, who wrote in dissent that this is more properly the work of Congress, even if the Court’s earlier precedents are open to question. He further stated that E-commerce has grown over the years as a vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule.

Some are concerned that overturning Quill will allow states to go far beyond what South Dakota passed, possibly requiring collection by retailers with a single sale in a state or perhaps trying to force the companies to comply retroactively. Congress, the retailers argued, should implement national rules rather than forcing the companies to deal with the specific requirements of what they say are 12,000 taxing jurisdictions nationwide. The Court did add more guidance when it stated that South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws may be.

Some believe that states and their entities are missing out on legitimate taxes that are simply being ignored. Ohio and 30 other states currently tax internet sales. A Government Accountability Office report says that states missed out on about $13.7 billion in tax revenue in 2017.

What does it mean for Ohio? In HB 49 otherwise known as the state budget bill passed in 2017, the legislature established a way for the Ohio Department of Taxation to collect sales tax from online vendors whose sales exceed certain thresholds. It is our understanding that the department has not yet implemented the system.

Ohio is a member of the Streamlined Sales Tax Governing Board along with 23 other states. This board is designed to establish uniform processes for the states to collect sales taxes from remote online sellers. Because of this membership, Ohio would not collect these taxes retroactively.

What happens now is still very much up in the air. It appears that the decision is narrow in its implementation. Some are taking the view that the ruling is limited to large online retailers, with small businesses clearly being viewed differently by the Court.

Will Congress finally be forced to legislate a uniform law for collection and disbursement? Will the rest of the states join the Streamlined Sales Tax Governing Board? Please stay tuned as yet another long-held structure being overturned brings many questions. We will watch with great interest as the decision is better explained and understood. As more comes to light, the Ohio Chamber will continue to update you.

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