By Joshua Burd
The U.S. Supreme Court has ruled that online retailers must collect sales tax from customers even in states where they don’t have a physical presence, effectively closing a loophole that has long been seen as a major disadvantage to brick-and-mortar retailers.
The 5-4 ruling in the case, South Dakota v. Wayfair, addressed an issue that has remained a top priority for commercial real estate advocates. The result could be tens of billions of dollars in new tax revenue for state governments, which have tried to address the issue through their own regulations, but still suffered from the complexity and the rapid rise of the ecommerce industry.
Experts say the Supreme Court’s action effectively levels the playing field by overturning another landmark decision, Quill Corp. v. North Dakota, which ruled in 1992 that states could not collect tax from online sellers unless they have a physical presence in the state.
“Despite the holding of Quill, the digital economy and the online marketplace drastically altered the way business and sales are transacted and therefore, states felt the need to change their policies as well to keep up with economic and commercial trends,” Jaime Reichardt, an attorney with Sills Cummis & Gross PC, wrote Thursday in its blog focused on tax issues. “As a result, states started getting creative with how they found physical presence.
“This culminated in some states adopting rules which would impose nexus on an out-of-state seller for merely earning above a certain ‘bright-line’ amount of sales from the taxing state. More than a half dozen states have adopted these ‘bright-line’ receipts nexus rules for sales tax with more to come.”
Decisions on sales tax and ecommerce could loom especially large in a state like New Jersey, which has a large population with vast spending power. Amazon, Wayfair and other online retailers have sought to capture that demand in the state and the region by opening sprawling fulfillment centers and smaller, last-mile facilities to ensure faster delivery times.
Reichardt, who chairs Sills Cummis’ state and local tax practice, also said the majority addressed potential concerns about compliance by citing advances in software or programs that will facilitate the process for online retailers and state treasuries.
“The major take-away from the case is that states can now force out of state sellers to collect sales tax if those sellers conduct above a de-minimis level of sales in the state, regardless of whether there is a physical presence in the taxing state,” Reichardt wrote in the blog, The SALT Lawyer. “Additionally, the Court’s decision may have broader implications beyond sales tax which could open the door for more states to adopt even more expansive economic nexus and bright-line receipts nexus rules for income and other business activity taxes.”