SCOTUS Decides Online Sales Tax Case
States may now require online sellers to collect sales tax on out-of-state transactions thanks to the recent ruling in South Dakota v. Wayfair handed down by the Supreme Court. The ruling, affectionately known as “Kill Quill,” allows states to require retailers to collect and remit state sales taxes for internet transactions. Since 1992 Quill v. North Dakota restricted states from collecting sales tax from retailers that didn’t have a physical presence. Income poor States and traditional brick-and-mortar retailers may be applauding the new ruling enthusiastically.
This development reflects the retail power of the internet and the digital economy. It is almost just as significant for American businesses as Tax Reform. Here’s why.
Retail industry leaders and owners of many bricks-only stores have for years pointed out that Quill’s physical presence requirements gave many out-of-state online retailers the advantage of avoiding the sales-tax collection burden. The ruling will mean higher prices for many online shoppers and billions of dollars in extra tax revenue for the states.
On the other hand, retailers that currently sell remotely into jurisdictions where they are not collecting and reporting taxes face a potentially significant challenge. It may also pose a headache for small-scale web merchants who will have to keep track of, and remit sales taxes, for thousands of jurisdictions.
These retail companies should immediately review their current sales tax processes and supporting technology to make sure they can accommodate any new requirements that now apply to their online sales – in South Dakota as well as in 44 other states with similar requirements! Fortunately many states have devised a “streamlined” filing system, in which a single state office collects and dispenses taxes for its counties and cities.
Many states already have laws on the books that were in limbo until the Supreme Court ruling. Some have a physical presence test for “nexus” in addition to a “click through” test, and others have an economic threshold test. Other states have notice-and-reporting laws that require companies selling through Amazon.com or Walmart.com to either collect and remit state sales tax, or to annually notify customers that they may owe use tax, or provide the state with a list of their customers so that the state can go after them. These laws have seldom been enforced for obvious reasons.
The ruling creates a slight competitive advantage for brick-and-mortar sellers, by slicing off a bit of the pricing advantage that online retailers have enjoyed. But the impact may be minimal at most since items are generally cheaper when bought online regardless of sales taxes. But the operational burden on companies in terms of time, technology, and expense is likely going to be substantial and have a cost.
Retail business clients will need to closely examine their operations to determine where they have to collect tax, whether their goods are taxable, and how they are going to handle the new tax computation, filing, and remittance obligations. That will have a cost. A bit of internal restructuring may be needed as well as additional staff, and that also will have a cost.
Some Fuoco clients will benefit from investors looking for opportunities within companies having tax compliance software and those that are developing other resources that collect, remit, and file state sales tax.
For clients who are online retailers, we suggest taking the following steps:
• Prioritize states where the company has the greatest economic presence and create a plan to register to collect and remit sales tax.
• Evaluate cash flow risks.
• Consider the effect on customer sales and satisfaction.
• Explore the impact of compliance on the financial statement.
• Review invoicing processes and controls, as well as procedures to deal with invoicing errors that no doubt will occur.
The silver lining in the cloud is that the Court warned States that the ruling is not a “blank check” – laws must minimize the burden on interstate commerce. The Court also included an assurance that “no obligation to remit the sales tax may be applied retroactively.”
Contact Us: The professionals at Fuoco Group will keep clients posted as our accounts and business advisors continue to assess the Supreme Court’s decision and its far-reaching implications. If you have questions, contact us toll free at 855-534-2727.