Attention e-commerce entrepreneurs and businesses: The Supreme Court of the United States is currently reviewing a seismically important case, South Dakota v. Wayfair. If South Dakota wins, online storefronts will likely become subject to the same taxation standards as brick-and-mortar retailers.
South Dakota v. Wayfair: Case Basics
Plaintiff: South Dakota
Defendant: Wayfair (the online retailer)
Gravamen: Can the state force out-of-state online retailers who don’t have a physical location in South Dakota to remit a 4.5% tax on resident sales?
South Dakota v. Wayfair: Case Details
Background: Quill Corp. v. North Dakota
South Dakota v. Wayfair is inextricably linked to the seminal 1992 Quill Corp. vs. North Dakota, which established the tax nexus standard.
In Quill, an Illinois office supply corporation, which advertised software in a mail-order catalog, didn’t want to remit sales tax to North Dakota for residents who licensed the program.
Ultimately, the court sided with Quill and established the current precedence: states can’t collect sales tax from online purchases unless the seller has a physical presence — or “nexus” — in the region.
Why did the court side with Quill and devise the “nexus” test? The Justices reasoned that companies don’t use tax-maintained resources, like roads, when they don’t have a physical presence in a state and shouldn’t have to assume the tax burden.
Enter E-commerce: Does Quill Still Make Sense?
Fast-forward twenty years. E-commerce is king. And on account of Quill, states and municipalities say they’re losing between $8 and $13 billion a year in tax revenue. Nearly all states have expressed frustrations with the standard and feel that today’s e-commerce realities render the ruling obsolete. After all, someone is delivering the billions of e-commerce packages across the country; state roads and resources are being used for online purchases.
Quill defenders argue that small businesses may bear a burden if SCOTUS overturns the ruling, as they’d be forced to establish complicated systems to collect remittance from 10,000 taxing jurisdictions. To that point, however, opponents argue that advancements in computer software make the task manageable for businesses of all sizes.
For the most part, brick-and-mortar retailers are rooting for South Dakota’s victory and Quill’s demise. In short, they want to “level off” the tax playing field, which they feel is done by making e-commerce retailers collect and remit local and state sales taxes.
Where Does the SCOTUS Bench Currently Stand?
According to reports, Justices Roberts, Alito, and Kagan feel Congress should “devise a new system” in large part because it would be unreasonable to require mom-and-pop online retailers to navigate thousands of tax jurisdictions. Roberts specifically mentioned that lawmakers should probably establish a “minimum threshold.”
The entire bench, however, does not agree with Roberts, et al. “Overturning precedents,” worried Justice Sonia Sotomayor, “will create a massive amount of lawsuits.”
For her part, Justice Ruth Bader Ginsberg questioned Congress’ ability to craft a cure for the problem. “If time and changing conditions have rendered [the Quill decision] obsolete, why should the court say: Well, we’ll let Congress fix it?”
The newest member of the bench Justice Neil Gorsuch seems primarily concerned about leveling the playing field for online and offline retailers, inquiring: “Why should this court favor a particular business model that relies not on brick and mortar but on mail order?”
Justice Breyer asked questions but didn’t stake a position either way.
The Justices will deliberate on the matter and hand down a ruling within the coming months.
Will Overturning Quill Raise Online Prices?
What happens if the justices vote to overturn Quill and eliminate the nexus tax standard? Well, we all may see a spike in online prices. However, Amazon has been collecting sales tax in most states for some time, so the shift may not be that noticeable to consumers. Yet, it could have a significant impact on profit margins for online sellers and e-commerce entrepreneurs.
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