Online Sales Tax: It’s not too often the U.S. Supreme Court overturns a prior ruling on an issue it has already decided; most often, the nine justices are tasked with sorting out conflicts of law involving different interpretations from lower courts at the state and federal circuit level.
But on Thursday, the court decided the South Dakota v. Wayfair sales tax case, which challenged South Dakota’s application of its sales tax to internet retailers who sold to customers in that state, but had no property or employees there. In 1992, the high court held in Quill Corp. v. North Dakota that the dormant commerce clause power restricted state taxation of interstate commerce.
Of course, cybersales have exploded since then. Amazon was founded in 1994. Luddites screamed that online sellers would be the death of brick-and-mortar, traditional retail. The bankruptcies of Borders, Blockbuster, Kmart and Toys R Us were blamed, in part, on competition from cyber customers. Other stores, such as Walmart and Wayfair, embraced the trend.
Overstock, Newegg and Wayfair all argued they should be exempt from South Dakota’s law because they did not have any facilities or personnel there. The 41 states that supported South Dakota encouraged overturning the Quill decision, arguing that a case that involved mail-order catalogues was obsolete for the era of e-commerce.
Justice Kennedy, writing for the majority, noted: “South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules.”
The dissenting justices pointed out that Congress could standardize federal law on sales tax collection, but not all states collect sales tax. They encouraged a legislative fix for the issue, rather than judicial intervention.
So what does this ruling mean for our clients? Not much, at first blush. Ohio passed online shopping sales tax laws designed to compel e-commerce outlets to collect from their customers during transactions, which took effect in 2015. The largest e-commerce vendor, Amazon, already collects sales taxes from most customers in Ohio at a rate of 5.75 percent, based on Ohio Rev. Code Section 5739.02. But if you have an account with Wayfair or another online seller that didn’t collect sales tax before, that site probably will impose sales tax at some point in the future.
If you are a business client concerned about your online sales and state sales tax collection for Ohio and other jurisdictions, talk to the attorneys at PS&E about potential impacts. We can guide you through the ramifications of this decision, as well as other complex tax matters.