by Gregory S. Dowell
January 31, 2018
Since the consumer’s use of the internet became widespread (a few years after it was invented by Al Gore), one of the thorniest issues has been the taxation of sales that are made over the internet to out-of-state residents. The Supreme Court has recently agreed to take up a sales tax case from South Dakota, as South Dakota seeks to allow states to require out-of-state retailers to assess sales tax on every internet purchase.
South Dakota will ask the Supreme Court to reverse a 1992 ruling that the high court made, which declared that retailers with no physical presence in a state are not required to collect state sales tax on sales to residents of that state. While some big online retailers, like Amazon, have changed their business model to collect sales tax on every transaction, regardless of whether the retailer had a physical presence, many other retailers have not followed suit. In November, a report from the U.S. Government Accountability Office made the estimate that some $8 to $13 billion dollars of annual sales tax revenue was possibly at stake, if online retailers were required to collect sales tax. Only five states in the U.S. do not have a state sales tax.
As quick background, as a result of the Quill vs North Dakota case in 1992, an out-of-state company is not required to charge sales tax to a nonresident purchaser. The way that the purchaser’s home state is made whole is by the purchaser paying what is called a “use” tax, which is sort of the mirror image of the sales tax in a sales transaction that crosses state lines. As one might expect, the rate of individuals self-assessing this use tax is very low. The failure of online retailers consistently assessing sales tax has given them a decided advantage over traditional brick-and-mortar retailers.
With the loss of revenues and immense pressure on virtually every state’s budget, South Dakota is simply the first state in a wave of states that are looking to settle this issue. In South Dakota’s case, the stakes are especially high, as it has no income tax and depends on the collection of sales tax to fund its budget. It is anticipated that the Supreme Court will rule by June, when its current term comes to an end. All online retailers should be paying special attention to developments in this case.