In the wake of a recent U.S. Supreme Court decision, online merchants doing significant business in a state may be required to collect sales taxes on products shipped to that state even if the merchant has no physical presence there.
South Dakota v. Wayfair, Inc., handed down June 21, overturns Quill Corp. v. North Dakota, a 1992 case that required states to show that a merchant had a “physical presence,” such as a warehouse or office, in the state before requiring a merchant to collect sales taxes. This became a barrier to collecting sales taxes on e-commerce, which exploded in popularity in the decades after the decision.
While goods shipped into states with sales taxes are generally subject to a use tax paid by the consumer if sales tax is not paid by the merchant, consumer compliance is rare. A report from the U.S. Government Accountability Office said Texas state and local governments could have gained about $1 billion in revenue if all remote sales had been taxed in 2017.
Court precedent has determined that the Commerce Clause of the U.S. Constitution inherently restricts certain state taxes that inhibit interstate commerce. In Complete Auto Transit, Inc. v. Brady (1977) the court held unconstitutional a state tax imposed on a merchant without a “substantial nexus” in the state. The Quill decision in 1992 confirmed that a substantial nexus implied a “physical presence.”
Last month’s decision in Wayfair eliminates the requirement for physical presence but not for substantial nexus. The court said the substantial nexus requirement was satisfied because the South Dakota law applied only to merchants doing more than 200 transactions in the state or more than $100,000 in total sales.
Many large e-commerce businesses, including Amazon and Walmart, already pay sales taxes in Texas, either by an agreement with the state or because they have a physical presence through a store or warehouse. In its initial guidance on the ruling, the Texas Comptroller’s Office said it had begun reviewing rules that may need to be updated, but the changes would not include any retroactive application of the new law to remote sellers that have no physical presence in Texas.
In light of Quill’s reversal, some say Texas should require more internet retailers to collect sales taxes. This would broaden the tax base, they say, and level the playing field between the online merchants that do not pay sales tax and brick-and-mortar stores, which must. Others say states should be cautious about taxing more online sales because it may not be practical for every state right now. Texas has more than 1,500 taxing jurisdictions and, unlike South Dakota, is not a member of the Streamlined Sales and Use Tax Agreement (SSUTA) that centralizes the collection of sales taxes. In its recent decision, the court considered the low cost of compliance in South Dakota due to its SSUTA status, and critics caution that similar laws in other states might not meet the same standard. Still others say that any increase in sales tax collections must be accompanied by tax relief. Sales taxes increase consumer prices and reduce economic vitality, they say.
By Anthony Severin