Supreme Court Ruling Rescinds Sales Tax Rules
The Supreme Court announced its ruling today in the biggest sales tax case in 26 years. The ruling affects remote and online shopping by removing a limitation on a state’s ability to enforce its collection and remittance statutes against retailers who do not have a physical presence in the state.
Every state with a sales tax requires retailers to collect sales tax from customers and to pay that tax to the state’s department of revenue. A retailer with a brick-and-mortar store in a state has little choice but to comply since the law may be more easily enforced against it. However, retailers who sell by catalog or internet only, and have no presence in the state, have always argued that this requirement is unduly burdensome. The states, in turn, have had great difficulty in enforcing this law against these “remote retailers.”
By ruling today that a retailer is not required to to have a physical presence in a state before it is subject to that state’s taxing laws, the Supreme Court removed the limitation on enforcement. This frees those states with a sales tax to impose an obligation to collect and remit sales taxes on remote retailers. In recent years, states had begun to get creative with their statutory schemes to impose such obligations without violating the Constitutional rule. However, South Dakota and several other states took a cue from Justice Kennedy in a previous ruling that it was time to bring a Constitutional challenge to the old rule.
The impact of this ruling will be felt by nearly every retailer and consumer. Removing the limitation means that nearly all catalog, online, and remote sales will have sales taxes collected by the retailer to be remitted to the proper jurisdictions, at least in states that impose a sales tax. For consumers, this means that the taxes will be the same on purchases made in brick-and-mortar stores and those made online. For retailers, the impact is much larger.
Currently, forty-five states, two territories, and Washington D.C. impose a sales tax on retail sales. Many of these states allow localities to impose an additional sales tax, and some states allow for localities to create their own sales tax schemes entirely. In total, it is estimated that there are at least 10,814 different sales tax jurisdictions in the United States, according to the Tax Foundation. That includes 1,594 different jurisdictions in Texas, 1,393 in Missouri, 1,002 in Iowa, 521 in Kansas, and 230 in Nebraska. In fact, because of local sales tax, only two states, Oregon and New Hampshire, have zero sales tax jurisdictions. On top of that, six states allow for “home rule” jurisdictions which allow specific cities and localities within these states to not only impose their own rates, but also have their own exemptions, definitions, and administrations to collect sales tax. This can be particularly difficult because not all of these home rule jurisdictions are set-off by separate zip codes, counties, or even city boundaries. The number of jurisdictions, along with the fact that states and “home rule” jurisdictions can define their own bases, exemptions, terms, and penalties, make compliance a large undertaking for any retail business.
The statute that was upheld in the case is a South Dakota statute. The statute requires retailers who deliver more than $100,000 of goods and services into South Dakota or engage in 200 or more separate transactions for delivery of goods or services into South Dakota to collect and remit sales tax. The statute also restricts retroactively charging sales tax, so it is only effective as of this writing, June 21, 2018.
As of this writing, at least fourteen other states have statutes similar to South Dakota’s, but many more are expected to use older statutes that are designed to reach the Constitutional limits to impose sales tax on online retailers. Many are expected to enact statutes similar to South Dakota’s during regular or special sessions over the next few months.
One major concern retailers raised during the case was the possibility that states will apply their statutes retroactively to impose sales tax on businesses in previous years for uncollected taxes. Unfortunately, the problem of retroactivity is left up to Congress as it is generally not within the Court’s power to insert a legislative rule as part of its opinion. South Dakota’s scheme, as well as a few others that have passed the so-called “economic nexus” standards similar to South Dakota’s, have prohibited any retroactive application in their statute. Other states, as well as many home rule jurisdictions, are free to determine their own rules, and if it comes down to the decision of a particular agency or official, i.e. the State Tax Commissioner, there is the possibility that the decision could change over time. The Supreme Court Opinion noted that other aspects of its Commerce Clause jurisprudence may prevent retroactivity and protect small businesses, but did not explicitly rule on those issues.
For now, the ruling means that most retailers will have to start collecting and remitting sales taxes in the following states, even if the retailer has no employees or operations of any kind in that state: Alabama, Georgia beginning January 1, 2019, Indiana, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Pennsylvania (though a retailer may elect to follow notice and reporting requirements in lieu of collecting), Rhode Island (similar to Pennsylvania, the retailer has a choice), South Dakota, Tennessee, Vermont, Washington (Business & Occupation Tax only), and Wyoming.
The list of states will grow quickly, and it will be important to stay informed about which states are enacting new statutes or enforcing old ones against online retailers. In the long run, it is expected that all states will adopt rules for online retailers to collect and remit sales tax, and retailers will have to continue to ask Congress to set standards, limitations, and de minimis thresholds to protect small retailers from the burden of complying with sales tax laws in over 10,000 jurisdictions.
In the following weeks, Koley Jessen attorneys will host a webinar regarding the impacts of the ruling on retailers and non-retailers. When a date is set, we will share that information.
Please contact an attorney in the Tax Practice Group at Koley Jessen with any questions.