The future of e-commerce taxation in the United States may soon be determined as the Supreme Court is set to hear South Dakota v. Wayfair Inc. in the coming months. The ruling may pave a clear path through the current tax landscape, or result in significant compliance hurdles, for those selling online. A decision in favor of either extreme is unlikely, but what can be expected is some guidance on how states should tax online retailers.
The current online sales tax framework is based on the 1992 decision in Quill Corp v. North Dakota. This case established that retailers are exempt from collecting sales taxes when making sales online, as long as they do not hold a physical presence in the state of sale. For years, brick and mortar retailers and state governments have fought this ruling. Retailers claim an extreme disadvantage, given their consumers have to pay sales tax. Governments claim they are losing billions of dollars in tax revenue. As e-commerce giants continue to outpace retailers, critics are pushing back harder. There is even a trendy name – the “Kill Quill” movement—and it is has gained traction.
Many states have chosen to ignore the Quill ruling, and implement their own tax system on online retailers. Currently, South Dakota requires companies that do $100,000 or more of business within the state to collect sales tax on purchases. Does a state have the power to implement a law that contradicts federal law?
The face of retail is rapidly changing, and online sales undoubtedly eat up more of the market share then in 1992, perhaps it is time to update this framework.
The Quill decision was rooted in the logic that complying with 50 different sales taxes regimes across the states would interrupt the flow of interstate commerce. Kill Quill proponents should have to prove that a new regulation imposing individual state sales tax will not become a regulatory nightmare.
A number of states besides South Dakota have decided to tackle the issue head on by directly taxing Internet sellers. Other states, such as Massachusetts, have attempted to sidestep the Quill issue by establishing physical presence in the form of ‘cookies’ on shopper’s computers. Others, such as Pennsylvania, tax internet sales platforms like Amazon and eBay. There is an obvious difference between a small time Etsy seller, and a multibillion dollar company that has all of its sales online. We hope that the Court will include distinctions that would protect the small business community.
At question in the power to tax is how do we define “a presence”? The articulation of ‘physical presence’ within a state may have other important implications. If a company is “present” enough to justify paying taxes, does it also have other obligations within the state? Can they be sued in that local jurisdiction? Do they need to comply with other state regulations? This ruling may establish a new framework for how we treat and define businesses that exist in cyberspace. For better or worse, this country is in need of evaluating the outdated model, and to set forth clear rules governing e-commerce businesses.