The Supreme Court of the United States (SCOTUS) has tackled a case that questions online state sales taxes. More specifically, the court will answer when an online business is required to apply a state sales to tax to an online transaction.
How have state sales taxes applied to online transactions thus far? In the past, the answer was rooted in previous case law. In the precedent case, Quill Corporation v. North Dakota, SCOTUS found the Constitution barred the ability of a state to apply a sales tax on a business that did not have a “substantial connection” to that state.
As such, unless a business had a substantial connection to the state, the state sales tax did not apply. Examples of substantial connections included the presence of a brick and mortar store or a headquarters.
How will this case change things? SCOTUS is now taking on South Dakota v. Wayfair. In this case, South Dakota implemented a 4.5 percent sales tax for any business that conducted over $100,000 in sales in the state in the span of one year. The state then sued three online stores for violation of the law.
One of the key questions justices are attempting to answer to come to their ruling is the true cost to online retailers of implementing a state tax collection on consumers at a national level. Those in favor claim software can ease the burden, those against contend the software is expensive and would cripple small businesses that operate in the online marketplace.
It remains unclear how SCOTUS will rule. The justices have voiced a concern that the answer may best lay with Congress. The final vote will likely be a close one. A piece in the New York Times notes that three justices appear ready to overrule Quill and impose an online state sales tax. The justices should share their holding shortly.
A ruling in favor of South Dakota will impact businesses throughout the country. These businesses may need to restructure their tax plan to ensure they are meeting their tax obligations. In the event of such a ruling, it is wise to seek legal counsel to better ensure your business’ interests are protected.