Most business owners are too focused on managing the company, including customer service, account management and new product offerings, to pay close attention to tax case law. However, businesses should be aware of a Supreme Court ruling last week that will impact how and where online companies pay sales tax. In the case of South Dakota v Wayfair, the central issue was whether a state could require an online retailer to collect sales tax when they don’t have a physical presence (warehouse, distribution center or offices) in a state. The state asserted that billions of dollars in tax revenue were being lost because of the shift to online retailers. Wayfair argued that removing the requirement to have a physical presence to collect sales tax would require undue burden on compliance. The Supreme Court ruled 5-4 in favor of South Dakota.
Why Is This Case Important?
In the world of accounting and taxes, this is akin to the World Cup finals or perhaps the Super Bowl because it overrides a 1992 Supreme Court ruling – Quill v North Dakota – that a state could not require any company to collect sales tax if they didn’t have a physical presence in the state. Online retailers used this as an opportunity to claim a price advantage over traditional brick-and-mortar stores and drive more business and revenue. Companies were very concerned that if the Supreme Court ruled in favor of South Dakota, the cost of compliance with each state’s regulation could be overwhelming.
Reversing Quill v. North Dakota
Overturning Quill was an accomplishment in itself. The Court’s decision in Quill was predicated on the Dormant Commerce Clause, a legal doctrine that prohibits any state legislation that would inhibit interstate commerce. Of course, today’s interstate commerce climate differs drastically from the facts in the Quill case, which had been decided during a time when interstate commerce dealt mostly with catalog sales. In Wayfair, the Court argued, “[b]y giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes, Quill’s physical presence rule has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” In a way, the state contended that the physical presence requirement was doing just what the Dormant Commerce Clause was seeking to prohibit: interference with [fair and just] interstate commerce.
Colorado Sales Tax Laws
In July 2017, the state changed the laws to require online retailers who have more than $100,000 in online sales from Colorado customers to notify them a sale or use tax liability could result from their transaction. The law requires companies to notify their Colorado customers of their obligation to pay use tax. Remote sellers that don’t collect sales tax must provide an annual summary to Colorado customers that spent more than $500. Finally, companies must provide the Colorado Department of Revenue with a report that includes the customer’s name, address and total purchases for the year. The law, which was designed to educate customers and hold retailers accountable, was viewed as an interim measure until the Supreme Court ruling. Now that the ruling has been issued, it’s likely Colorado and other states will revise their laws to require these retailers to collect sales tax.
The ruling opens the door for states to assert their right to require online retailers to collect sales and possibly other taxes. Since each state creates its own tax laws, it’s essential to pay careful attention to the laws to determine how you will be impacted. If you have questions about the ruling or need assistance with other state and local tax issues, Hanson & Co. can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.