Supreme Court Ruling Opens up Internet Sales Tax Collection Laws

by The ARB Team

The U.S. Supreme Court sided, 5-4, with South Dakota in South Dakota v. Wayfair, allowing South Dakota to keep its law requiring internet retailers with no physical presence (property or employees) in South Dakota to collect sales taxes from customers and remit them to the State of South Dakota. All nine justices of the U.S. Supreme Court agreed the decision in the 1992 case, North Dakota v. Quill, which has guided sales tax nexus laws for the past 26 years, was incorrect, but the four dissenting judges argued that Congress should be the one to fix the issue, not the Court.

In most states, internet retailers without any physical presence are not required to collect sales taxes; instead, the purchasers are required to calculate and pay use tax to their respective state and other municipalities, if applicable. Compliance by individual purchasers of items online, however, has been abysmal, and estimates of lost sales tax revenue for states and municipalities range from $8-$40 billion annually due to this lack of compliance.

Amazon began collecting state sales tax in 2017 in all 45 states that have sales taxes; however, they do not collect local sales taxes in all municipalities. Most other popular online retailers and smaller online retailers currently do not collect state and local sales taxes and rely instead on the customer to calculate and remit their use taxes.

The U.S. Supreme Court’s decision in South Dakota v. Wayfair only sides with the specific situations in the South Dakota tax laws, meaning the laws of other states may or may not pass further review. The U.S. Supreme Court ruled in favor of South Dakota namely due to the following:

  • South Dakota’s tax law has a safe harbor for internet retailers that have limited sales in the state, so they are not required to collect and remit the sales taxes (collection required if at least 200 transactions or $100,000 in sales to South Dakota residents)
  • South Dakota’s tax law does not create an obligation for sales prior to the law’s enactment
  • South Dakota has adopted the Streamlined Sales and Use Tax Agreement to minimize administrative burdens related to compliance with interstate commerce tax laws
  • South Dakota provides free software to sellers to help with administering sales tax rules, and, if used by the retailer, the retailer is protected from any potential audit liability
  • Limited local sales tax laws, as municipalities may only assess 1% or 2%
  • Current physical presence laws cause more issues than they solve, as they give unfair advantages to online retailers, which has a significant effect on development in most states

Thirty-one states currently have laws requiring sales taxes to be collected on internet sales without a physical presence. Many of these laws were thought to be illegal based on the 1992 case, North Dakota v. Quill, but Congress and many courts have refrained from addressing the issue until now. It is likely that many states will implement new sales tax laws or modify their existing ones to gain access to more revenue. The Court made it clear that any laws discriminating against or imposing undue burdens on interstate commerce by being more complex or overreaching would not be acceptable.

Below are the current laws for out-of-state vendors to collect and remit sales taxes for all New England states:

Connecticut

General rule: must have physical presence in the state to be required to collect and remit sales taxes

Exception to the rule: retailers that have an agreement with a person in CT to pay for customer referrals obtained from a link on a CT seller’s website and have gross receipts greater than $2,000 from sales in CT over the prior four quarters

Maine

General rule: must have physical presence in the state to be required to collect and remit sales taxes

Exception to the rule: gross revenue from delivery of property or services into ME is greater than $100,000 in a calendar year or the vendor has at least 200 transactions in the prior or current year

Massachusetts

Must have physical presence in the state to be required to collect and remit sales taxes

New Hampshire

No state general sales taxes

Rhode Island

General rule: must have physical presence in the state to be required to collect and remit sales taxes

Exception to the rule: retailers that have an agreement with a business or seller in RI to pay for customer referrals obtained from a link on a RI seller’s website and have gross receipts greater than $5,000 from sales in RI over the prior twelve months

Vermont

General rule: must have physical presence in the state to be required to collect and remit sales taxes

Exceptions to the rule:

Retailers that obtain customer referrals obtained from a link on a Vermont seller’s website and have gross receipts greater than $10,000 from sales in Vermont

Any person that has at least $50,000 in sales in any 12-month period and is soliciting sales of property in Vermont routinely, or at least seasonally, must also collect sales taxes

 

 

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