Explosion in Online Sales Has Changed Business Dramatically
The U.S. Supreme Court today handed down a decision on the highly anticipated South Dakota v. Wayfair case, which challenged South Dakota’s collection of sales tax from out-of-state businesses that do not have physical presence in the state but that sell and deliver into South Dakota tangible personal property, products transferred electronically, or services.
South Dakota passed a law in 2016 that set off a dramatic and market-altering shift in taxation of online sales, one that concluded with today’s Supreme Court’s 5-4 decision upholding the South Dakota law allowing the expanded collection of sales tax. The decision broke with 50 years’ worth of legal rulings that barred states from collecting sales tax on purchases of products and services their residents make from out-of-state companies that lacked a physical presence in their state.
In ruling in favor of South Dakota, the Supreme Court overruled decisions in National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753Â and Quill Corp. v. North Dakota. 504 U.S. 298. The previous rulings had prohibited states from imposing sales tax on vendors who do not have an in-state physical presence.
In 1967, the Supreme Court ruled that states could not force mail-order catalog companies to collect sales taxes unless a buyer lived in a state where the company had a physical presence such as a retail store, headquarters, or a distribution center. But in 1967, the volume of mail order was minor compared to in-store sales. As years went by, brick-and-mortar businesses began to realize their disadvantage, because they had to charge sales tax but out-of-state businesses without a physical presence did not.
Thirty-one states currently have laws taxing internet sales. Today’s decision will certainly cause states to review their laws against South Dakota’s model to ensure that they survive in light of the ruling.  South Dakota Department of Revenue has estimated gaining sales tax revenue of $48 to $58 million a year if they collect tax on out-of-state companies selling into the state without a physical presence in South Dakota. On the national level, it is estimated states are losing $8 -$33 billion every year in sales tax due to the decisions of Bellas Hess and Quill.
REDW’s State and Local Tax specialists have closely monitored the proceedings and are conducting a thorough analysis of the decision. Stay tuned for more details. Please contact James Ortiz if you wish to discuss your individual state and local tax needs.
