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  • Writer's pictureAIM Team

Question of sales tax on online purchases goes to high court

South Dakota v. Wayfair, Inc. could change the way online purchases are taxed. The current standard for collecting online sales/use tax is: if a business is shipping to a state where it doesn’t have an office, warehouse or other physical presence, it doesn’t have to collect the state’s sales/use tax – or any local taxes.

That means large retailers which have brick-and-mortar stores nationwide, generally collect sales tax from customers who buy from them online. But other online sellers can often avoid charging the tax.

States generally require consumers who weren’t charged sales tax on a purchase to pay it themselves, often through self-reporting on their income tax returns. However, states have found that only about 1 percent to 2 percent actually pay.

States get more of the tax if out-of-state sellers have to collect it, and states say software has made sales tax collection simple.

In 2016, South Dakota passed a law requiring those sellers to collect taxes on sales into the state, a law challenging Supreme Court precedents. The state, conceding it could win only if the Supreme Court reverses course, has lost in lower courts.

South Dakota says the high court’s previous decisions don’t reflect today’s world. The court first adopted its physical presence rule on sales tax collection in a 1967 case dealing with a catalog retailer (National Bellas Hess). At the time, the court was concerned in part about the burden collecting sales tax would place on the catalog company. The court reaffirmed that ruling in 1992. Both of these decisions involved catalog and mail order types of sales.

Three justices — Neil Gorsuch, Clarence Thomas and Anthony Kennedy — have suggested a willingness to rethink those decisions. Kennedy has written that the 1992 case was “questionable even when decided” and “now harms states to a degree far greater than could have been anticipated earlier.”

“Although online businesses may not have a physical presence in some states, the Web has, in many ways, brought the average American closer to most major retailers,” he wrote in suggesting the days of inconsistent sales tax collection may be numbered. “A connection to a shopper’s favorite store is a click away regardless of how close or far the nearest storefront.”

“Our Missouri businesses are competing with out-of-state companies that are doing business here by establishing a virtual presence which, in many ways, is not only akin to but may be more of a connection than a physical presence,” said Ray McCarty, president of Associated Industries of Missouri. “In order to allow our main-street businesses to fairly compete, the Supreme Court could use this opportunity to require out-of-state retailers selling to Missouri customers to collect our state and local use taxes,” said McCarty.



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