Published: Tue, April 17, 2018
Markets | By Noel Gibbs

Supreme Court to decide if all online retailers must collect sales tax

Supreme Court to decide if all online retailers must collect sales tax

Wayfair is a challenge to Quill Corp. v.

The debate about paying sales tax on online purchases is heading to the U.S. Supreme Court.

States like South Dakota say it's unfair for online retailers to skirt sales taxes, which may give them an unfair advantage over a small mom-and-pop store in the local community.

Small, independent online retailers have protested that requiring them to collect and pay sales tax for all states presents a hardship that could drive many of them out of business, but the National Retail Federation (NRF) supports a uniform collection of sales tax by all retailers, saying states are losing out on much needed tax revenue.

However, in 2016, South Dakota passed a law requiring retailers with at least 200 transactions or $100,000 in sales per year in the state to collect state taxes.

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The Supreme Court is expected to issue a decision this summer.

Q: Where does the physical presence rule come from?

In a court filing supporting South Dakota, more than 40 states said the retroactivity concern is overblown. Even retail companies without a physical store in South Dakota were required to follow the state law. However, this is not guaranteed.

Although South Dakota's tax law applies only prospectively, critics say overruling Quill could open retailers to years of retroactive liability in other states.

It is also possible that Congress could finally take action.

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But the internet companies that sued to block the law - Wayfair, Overstock and Newegg - say in their Supreme Court filings that state sales tax systems "remain inordinately complex and burdensome during the internet era, just as they were before it began". About half of Amazon's sales involve goods owned by third-party merchants, many of which don't collect tax.

That covered most large retailers, like Macy's and Walmart, because they have stores in almost every state. At the time, the court was concerned in part about the burden collecting sales tax would place on the catalog company.

Other states are aggressively pushing this issue, too. Wyoming, Indiana and Tennessee, for example, have ongoing cases and could eventually make their own distinct arguments to the court. Thanks to the Supreme Court, their cause may finally be addressed. "Such a rule firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes". States generally require residents who weren't charged sales tax on a purchase to pay it themselves, often through self-reporting on their income tax returns.

Online retailers that want to face the future with confidence - and ensure their ability to focus on satisfying the needs of customers - should immediately develop a reliable strategy for tracking evolving sales tax regulations, assessing their impact on their businesses, and automating sales tax compliance.

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