The United States Supreme Court recently decided that states can require out-of-state retailers to collect sales tax from customers, even if they don't have a physical presence in the state.
Ever wondered why some websites charge sales tax and others do not? It's because in1992, the Supreme Court rendered a decision, in Quill Corp. v. North Dakota, that effectively prevented states from collecting any sales tax from retail purchases made over the Internet or other e-Commerce unless the seller had a physical presence in the state.
A quarter of a century later, on June 21, 2018, the Supreme Court decided that the physical presence rule is unsound and incorrect.
In South Dakota v. Wayfair, Inc., Justice Kennedy, joined by four other justices, decided that the physical presence rule is far removed from economic reality and results in significant revenue losses to the States.
South Dakota claimed to lose between $48 and $58 million annually because it cannot collect taxes from out-of-state retailers like Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., who were merchants with no employees or real estate in South Dakota.
The Court stated that
Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced.
Worse still, the rule produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable.
The Court acknowledged that the Internet’s prevalence and power have changed the dynamics of the national economy. The Court also accepted that states are already confronting the complexities of defining physical presence in the Cyber Age.
Ultimately, this was probably the right decision, and other states will attempt to impose tax liability on out-of-state retailers. As the Court mentioned, small businesses and start-ups will suffer some impact, but we have to embrace the modernization of our economy and adapt as necessary.