In 1992, the Supreme Court ruled that companies were not required to collect sales tax on mail orders to states in which the company had no physical presence. Of course, even the top justices in the country couldn't anticipate today's digital marketplace, where orders flow through a fulfillment warehouse rather than a brick-and-mortar store.
Many states, dependent on sales tax for a major part of their funding, are losing out on millions (some say billions) of dollars of revenue. A group of states led by South Dakota is challenging the online sales tax ruling as outmoded. Where does the issue stand now, and how is it likely to play out?
Setting the Stage
Increased online sales activity has eroded the "physical presence" doctrine. Out of 45 states that have a sales tax, 31 have expanded their collections to include businesses with no physical presence. While some states are enacting reasonable laws, others are using questionable methods to skirt the existing regulations.
Since 2011, three separate bills regarding online sales tax have been introduced to Congress. Each version has had some degree of support, but they have all failed to pass.
South Dakota v. Wayfair, Inc.
After South Dakota passed its own online sales tax law in 2016, the state sued digital retailers Wayfair, Overstock.com, and Newegg. Reasoning behind the suit was twofold:
• The original law was based on the idea that it was too difficult for companies to calculate varying tax rates across the country, a distinction that current technology has made moot.
• Brick-and-mortar stores, which are required to pay state sales taxes, are put at an even greater disadvantage compared to online retailers.
For their part, online retailers argued that collecting sales tax has actually become more complicated as the number of local tax entities has more than doubled. The South Dakota Supreme Court ultimately upheld the physical presence statute.
U.S. Supreme Court: The Final Stop
South Dakota v. Wayfair, Inc. has now moved on to the U.S. Supreme Court, which heard arguments from both sides on April 17, including 15 briefs in support of South Dakota and 23 briefs supporting the retailers. It's expected that the final decision will be rendered in late May or early June.
Now the predictions have begun. How will the Court come down on this issue? Tax Foundation, a major independent tax policy nonprofit, sees a narrow victory for South Dakota based on past decisions, while respected newsmagazine The Economist has a similar opinion, but sees the swing vote going down to the wire.
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