Wayfair Supreme Court Decision

Economic Nexus At A Glance

items purchased off the internet now taxed

What Happened:

To understand the Wayfair Supreme Court decision, we first have to go back 26 years. In 1992, the Supreme Court heard a case between a company known as Quill and the state of North Dakota. North Dakota wanted Quill, a company with no direct ties to ND, to remit sales tax. The supreme court decided since Quill had customers but no offices there, it didn’t have to collect sales tax. No presence, no tax.

In 2018, South Dakota set out to challenge this ruling. The state pointed out the ruling did not factor in internet retailers. In South Dakota’s view, Quill was obsolete. It simply wasn’t the same world. Additionally, South Dakota claimed with Quill in place the explosion of online purchases caused a massive loss of state revenue.

Excerpt from Wayfair v South Dakota Supreme Court page 19
585 U. S. No 19 (2018)

Online retailer Wayfair, along with Overstock.com and New Egg, argued the decision should stand. In their opinion, they should not have to charge sales taxes since they are not located in South Dakota. Knowing other states would follow, they argued it would be difficult and very expensive to maintain compliance in so many different tax districts.

South Dakota won.

Regardless of location, states can now require businesses to remit sales tax. Termed economic nexus, the amount of sales or transactions a business makes is enough to trigger a connection, or presence, in that state.

As a result, the finance and tax worlds have been in an uproar since.

Why it Matters:

Now, one state after another is quickly taking the opportunity to pass similar laws. Governments are attempting to catch all of these taxes that are falling through the digital cracks. As of January 2019, over half of the states passed laws similar to South Dakota.

The thing about all of this is: these aren’t actually new taxes, just a new way to get the money. In addition to sales tax, something called a use tax exists. Less well known, it is almost just as present as sales tax.

Pennsylvania, for example, has a specific use tax form. If I live in Pennsylvania and go to a state without sales tax to buy a laptop, I owe the state of Pennsylvania 6% of the cost of that laptop. As a PA resident, I have to do the math, fill out the paperwork, and mail the form and a check into the state government. The same rule would hold true if I purchased the laptop online.

Sample of PA Use Tax Form

Unsurprisingly, very few people do this. Instead of states taking on the daunting and almost impossible task of hunting down everyone who ever bought anything online, the states are asking for the taxes from the internet retailers themselves. The Wayfair Supreme Court decision gave them the permission they needed to do just that.

There are still concerns…

Sellers are going to receive pressure to collect taxes where they have no representation. Plus, eCommerce businesses now have to calculate the taxes based on a variety of factors that vary wildly from state to state. Then, collect the correct amount of sales tax, and remit monthly payments to every state they have economic nexus in.

Also, when/if Congress decides to act, they have the ability to overturn any and all decisions the Supreme Court has made on the interstate commerce cases. Essentially, one bill from congress would undo all of this, and start the conversation all over again.

Also, there is some concern online sellers are damaging small businesses that are located physically within the states. To some, is not seen as an unfair tax on eCommerce businesses, but rather a long overdue leveling of the playing field between physical stores and their eCommerce counterparts.

Looking out for the little man

While, there are several arguments against this new tax law, this major economic decision isn’t seen as all bad. To deliver these items, delivery trucks are driving on roads that need paved, by trees that need trimming, and through lights that need regular upkeep. Understandably, the money for all of that maintenance has to come from somewhere.

During the debate, compliance issues were a hot topic. It would be difficult for small businesses to adhere to 50 different rules and regulations. National and state governments are continuing that conversation. They are holding countless meetings and discussions to implement these new laws in a way that avoids burdening retailers.

Moving Forward

All in all, it seems the solution to the Quill problem led to more questions than answers. Unfortunately, there is no way to know what long-term effect this decision is going to have on anyone. Consumers, business owners, and internet marketplaces as a whole all have to wait to see exactly what effect the Wayfair Supreme Court decision really has

If you are an eCommerce business confused about how these new nexus laws will affect you, contact us to see how EcomTax can help.

If you want to learn more about how each state treats economic nexus, head over to our State Spotlight Series, where we’re going through the states and their economic nexus and sales tax rules one by one

Please note: this blog is for informational purposes and should not to be considered, or used in place of, professional advice for your specific situation.

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