In June 2018, the U.S. Supreme Court made a significant decision regarding sales taxes and online businesses. The ruling in South Dakota v. Wayfair affirmed that a state can now collect taxes from an internet retailer even if the company lacks a physical presence there.
What the Supreme Court made clear, however, is that a state’s sales tax system cannot place any undue burden on interstate commerce.
Indeed, you could look at South Dakota’s model, which the Court effectively endorsed, as an example of fair tax policy. That’s because it includes these aspects:
1. It has economic nexus thresholds, which means companies that conduct limited business in South Dakota are given “safe harbor.” They pay little or no sales tax.
2. It prohibits any retroactive applications of new sales tax laws.
3. It’s adopted a streamlined sales and use tax agreement.
4. It gives companies access to free compliance software.
Most states will likely keep these characteristics in mind when they’re crafting and actualizing their own tax systems.
A Shift in Tax Law
This ruling overturns Quill Corp. v. North Dakota. In that 1992 Supreme Court case, a Delaware-based mail-order company called Quill didn’t think it should have to pay sales taxes to North Dakota. The majority agreed, stating that a business needn’t pay such taxes to any state where they didn’t have brick-and-mortar operations and where none of their employees resided.
The Wayfair decision is a boon to state governments across the nation, which stand to collect more tax revenue. In a statement, the National Conference of State Legislatures hailed it as “a victory for Main Street America.”
It’s true that this finding should benefit brick-and-mortar store owners — independent store owners in particular. They’ve long paid taxes that their internet counterparts didn’t.
Many online business owners, meanwhile, are considering various actions to offset the costs of implementing these new rules. For example, some may stop selling in certain states, at least temporarily, or place a moratorium on new hires. At the same time, large online companies are unlikely to feel the effects of this decision in any major way.
We don’t want to neglect everyday consumers here. It might sound counterintuitive, but they won’t really be responsible for paying more in sales tax than they were prior to the Wayfair ruling. Yes, they’ll pay sales taxes directly to internet retailers now. However, prior to this case, online shoppers had to declare to their home states whether or not they’d made purchases without paying sales tax.
How This Case Affects Virginia, Maryland and Washington, D.C.
So far, more than 20 states have established economic nexus models for online sales taxes. For example, South Dakota won’t collect taxes from such a company unless, over the course of a year, it makes 200 in-state sales or makes sales that are worth a total of at least $100,000.
In August 2018, the Office of the Maryland Comptroller drafted a plan to address this issue. According to its proposal, Maryland’s sales tax of 6 percent would apply to internet transactions. The nexus model would be the same as South Dakota’s: an annual minimum of $100,000 from Maryland consumers or 200 in-state sales.
The chief tax collector in Maryland sent this framework to the state legislature’s Joint Committee on Administrative, Executive, and Legislative Review. These guidelines represent an emergency regulation, which means they expire in 180 days. In that period of time, though, the General Assembly should be able to pass a permanent version of this law.
It’s not clear when Virginia or the District of Columbia, which currently have no nexus models, will write new regulations with respect to internet sales taxes.
Stay tuned for South Dakota v. Wayfair’s future consequences. For sure, it’s an area of the law that affects us all in one way or another.
Kevin Doyle, CPA
Kevin Doyle is the managing partner at Lanigan, Ryan, where he works with clients in a wide range of industries, including commercial construction, professional services, wholesales, and manufacturing. He has over 30 years’ experience working with closely-held businesses specializing in growth, development, performance, strategic planning, mergers and acquisitions, and general succession planning. He has served as an expert witness and holds experience in litigation support, fraud investigation, and claims analysis.
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