On June 21, 2018, the U.S. Supreme Court held that internet retailers may be required to collect sales taxes in states where they have no physical presence. The decision, South Dakota v. Wayfair, No. 17-494 (June 21, 2018), overturned a 1992 Supreme Court precedent which held that a retailer must have a physical presence in a state in order to be obligated to collect sales taxes.
Many in the retail industry have argued that the physical presence rule has given out-of-state on-line sellers an unfair advantage over brick-and-mortar competitors. The Court’s decision concurs. Writing for the majority, Justice Kennedy stated that the rule, “has come to serve as a judicially created tax shelter” for online and out-of-state businesses. The Court estimated that this “tax shelter” has caused states to lose between $8 and $33 billion in potential tax revenue every year.
The majority grappled with redefining “presence” in light of modern technology. The opinion states that “a business may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term.” In support, the Supreme Court considered evidence of the necessary presence for taxing purposes to be: a website accessible in the state, a website that leaves cookies saved to the customer’s hard drive, apps available for download, storing data in servers located in the state, and targeted advertisements.
The majority also addressed compliance burdens small businesses may face when selling a small volume to customers in many states. The Court’s majority stated that they expect software developers and congressional legislation to provide assistance and guidance with respect to compliance.
About twenty states are already encouraging uniformity by adopting the Streamlined Sales and Use Tax Agreement. In addition to providing sales tax administration software paid for by the participating states, this agreement requires single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules.
This high court decision is a major victory for “brick and mortar” retailers as well as State Treasuries. There will be much to follow as states move to impose and enforce sales tax collection obligations on on-line sellers. We will also be monitoring any legislation proposed in Congress to address this decision.