Changes Coming to Sales Tax on Internet Sales
It appears 2018 will be the year of tax law changes on many fronts.
In December 2017, the new Tax Cut and Jobs Act was placed into effect for 2018 and now, there is a possibility of major changes related to sales taxes on internet sales. The sales tax law that has previously been upheld since 1992 was overturned by the Supreme Court in June 2018, and this could potentially lead to big changes related to how and when states tax internet sales.
Prior to last month’s ruling, states typically had to demonstrate that a retailer had a “physical presence” in that state in order to subject their internet sales to sales taxes in that state.
This meant that if a company in Wilmington sold goods over the internet to customers in Florida and the company did not have a physical location or employees in Florida, then the company would typically not have to charge Florida sales tax and the goods would be sold without any tax charged (one of the major principles around sales taxes is that tax is charged at the location of where the goods are delivered to the customer).
Last week’s ruling overturns the “physical presence” standard, which could potentially create all kinds of new laws being issued by states to generate more revenue on internet sales.
Congress now has a big decision to make on whether to move forward with legislation on this subject by offering a nationwide law for online sales and use tax collection, or whether they will continue to allow the states to control how and when taxes are charged on internet sales.
Here is a little background on the cases that provided the precedent and the recent case brought by South Dakota. Quill Corp. v North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc. v Department of Revenue of Illinois, 386 U.S. 753 (1967) were brought into dispute by South Dakota in 2016. The two court cases both mandated that retailers must have a physical presence in a state, besides shipping goods into the state, in order for the state mandate that the retailer collect sales tax for that state. South Dakota argued that this law was affecting their revenue, citing that it loses between $48 million to $58 million a year in sales and use tax revenue due to out of state businesses that circumvent paying sales and use tax.
In order to offset this loss, South Dakota sanctioned a new law, S.B. 106, requiring out-of-state sellers that annually delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state to collect and remit sales taxes to South Dakota.
The Supreme Court reviewed the South Dakota case, South Dakota v Wayfair, Inc., et al, and decided to overturn the Quill Corp. and National Bellas Hess, Inc. cases previous rulings. The Supreme Court felt there were many reasons that the original Quill Corp. decision was no longer relevant to today’s modern society.
Some of the reasons include:
- The concept of physical presence was not a correct interpretation of the U.S. Constitution, specifically the Commerce Clause
- Instead of solving market distortions, Quill Corp. produced them
- Quill Corp. imposes “arbitrary, formalistic” distinctions that oppose the Supreme Court’s more modern standards under the Commerce Clause
- Interstate commerce is discouraged instead of encouraged by creating enticements to avoid financial activities in many states
Unfortunately, at this time, there is no way to tell which way Congress will decide to go and what the future holds but one thing is for sure, there will be changes. In the meantime, though, it is important to make sure that you are paying attention to your state’s sales tax and use laws, that you are following the laws, and that you are also conscious of what states you are shipping goods to so that you can understand that particular state’s laws.
If you have any questions, please don’t hesitate to reach out to your accountant at Earney & Company, L.L.P.
Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013. With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place. Earney & Company, L.L.P. is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services. For more information please visit www.earneynet.com or call (910) 256-9995. Chad can also be reached at firstname.lastname@example.org.