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The Dakotas seem like an unlikely place for major tax issues to arise.

Jul 2018

The Dakotas seem like an unlikely place for major tax issues to arise. But indeed, such is the case.  The issue at hand: can a state require a company with no physical presence within its borders to collect sales tax on items sold from outside the state to residents of the state?  Back in 1992 the Supreme Court considered this question in two cases – Quill Corp. versus North Dakota and National Bellas Hess versus the Department of Revenue of Illinois.  The Court ruled that unless the company making the sale had some sort of physical presence within the taxing jurisdiction, requiring the collection of sales taxes by these businesses was unconstitutional.

Times change, as do methods of doing business, and along came the internet, whose current form and capabilities were not fully envisioned back in 1992.  The Supreme Court revisited the issue in the South Dakota versus Wayfair case, and decided to overrule its prior decisions “because the physical presence rule of Quill is unsound and incorrect.”  Thus, states may now start to require all out of state sellers to collect and remit sales and use taxes on transactions with in-state customers irrespective of the seller’s physical presence. As the Court noted, “Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill.”

So now states that impose sales and use taxes – only Alaska, Delaware, Montana, New Hampshire, and Oregon do not – will be able to require retailers to collect sales taxes on their transactions whether or not they have a physical presence within the taxing jurisdiction.  There are estimates that some thirteen billion dollars could have been collected in 2017 had this rule been in effect.  While this may appear to affect only major retailers, it is in fact more of a burden on medium and smaller companies.  Amazon, for example, already collects sales tax on products it sells directly, and already has the systems in place to cope with this ruling.  Smaller vendors will have to cope with record keeping and filing requirements for all states that impose sales tax.

It appears that Congress will have to deal with this matter.   South Dakota requires collection of sales taxes by vendors that deliver more than $100,000 of goods or services into the state on a yearly basis or engage in more than 200 separate transactions for the delivery of goods or services into the state. Imagine the problem faced by a retailer dealing with 45 states each with its own rules that will undoubtedly vary widely.  Congress could enact rules setting uniform standards throughout the country in order to facilitate interstate commerce.  However, we would not hold out hope for speedy Congressional action.

In any event, there will be an impact on individual shoppers – no more tax-free internet shopping!  Your home state will catch up with you one way or another and you will pay your home state’s sales tax.

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