These days, more purchases are made online than from brick & mortar stores. Many of these sales were tax-free until, on June 21, the Supreme Court moved to close this tax loophole. In a 5-4 decision, the Court ruled that online retailers would now be required to collect sales tax even in states where they have no physical presence.
In 1992, in Quill Corporation v. North Dakota the Court ruled that the Constitution bars states from collecting sales tax unless they have a substantial connection to that state. Based on this ruling, online retailers were able to sell nationwide without having to collect and remit sales tax in states where they did not have physical presence.
In deciding to overrule Quill, the Supreme Court found that the rule in Quill banning sales tax collection when business lack physical presence in a state was an incorrect interpretation of the Commerce Clause. The Court noted that the Quill ruling gave out-of-state sellers an advantage resulting in loss of sales tax revenues to states. The Court also noted that Quill had created a 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.
Impact on states and business
The High Court’s latest decision opens the door for states to enact laws that require remote sellers to collect and remit sales or use tax regardless of whether they have a physical presence in the taxing jurisdiction. Online retailers will be required to collect sales tax based on economic nexus in a state. States will likely act to amend their sales tax statutes to reflect the holding of the Court and begin levying sales and use tax on interstate commerce that has substantial nexus.
Online retailers will likely have to implement changes to their internal systems to respond to the state statutes. Companies will need to know the value and volume of transactions in each state. They will need to set up processes to identify states in which there is economic nexus and register as retailers in those states. Companies having significant online sales may have to invest in sales tax software or other tools that track and calculate the sales tax collected and to be remitted to different states.
Congress may decide to move ahead with legislation to provide a standard for online sales and use tax collection that would make sales tax a business obligation rather than a consumer obligation.
Where to turn for help and advice
So, what else should online retailers and remote sellers need to know in light of the Court’s ruling? As always, your accounting and business advisors at Withum can help you work through all the financial and practical issues concerning your particular sales tax collection and remittance scenario.