U.S. Supreme Court Creates a New Standard for Online Sales Taxation

The U.S. Supreme Court ruled in South Dakota v. Wayfair that internet retailers who sell into South Dakota (even if they have no property or employees in South Dakota), will be subject to sales tax collection. This ruling will create a new paradigm for online sales taxation.

The Supreme Court ruling effectively overturned the long standing ruling in Quill Corp. v. North Dakota.

The court held in South Dakota v. Wayfair that the Quill case was “unsound and incorrect” and declared South Dakota’s law as constitutional. The court stipulated that any remaining claims regarding the commerce clause’s application in the absence of Quill may be addressed on remand.

The decision means that e-commerce companies and sellers using online platforms must now comply with South Dakota’s law which requires vendors without a physical presence to collect and remit sales and use taxes if they meet certain sales thresholds.

Given the Supreme Court’s ruling that held South Dakota’s model as constitutional, we expect that all other states that administer a sales tax will at least look to either copy South Dakota’s model or create their own model comparable to South Dakota’s model. The Supreme Court specifically reviewed South Dakota’s law and how South Dakota’s tax laws generally minimize the undue burden and prevents any discrimination upon interstate commerce.

Currently, there are 31 states that have laws that tax internet sales. There are only five states that do not impose a sales tax:  Alaska, Delaware, Montana, New Hampshire and Oregon.

Internet sellers have complied with a variety of state tax collection regimes, which resulted from the proliferation of the digital economy. Some examples are listed below:

  • The South Dakota economic nexus model which impose sales tax collection responsibilities on retailers that rise above a specified sales threshold.
  • The Colorado model that requires retailers to alert customers to their tax liabilities.
  • Several states use a marketplace provider model whereby requiring online sellers to collect sales tax on third-party transactions conducted on their platforms.
  • Some states have implemented “cookie nexus” regulations, which require online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies”.

Sax LLP will keep you updated as new legislation emerges.  If you would like to learn more about how this decision may impact your business, please contact your Sax advisor or Peggy Tilles at [email protected].

Get in touch with Sax by filling out the form below: