April 20th, 2018

SCOTUS considers expansion of online sales tax

Before the proliferation of the world wide web, folks would buy most of their goods at local brick and mortar stores. While online shopping was still nearly a decade away from being a "thing", mail-order shopping was still a big business. In 1987, North Dakota amended its laws in an attempt to collect sales and use taxes on mail order (and other direct-to-consumer) companies, even if they did not have a physical presence in the state.

Quill Corporation, a mail-order office supply company based in Delaware, was the sixth largest supplier of office supplies in North Dakota at the time. Despite having no physical presence in North Dakota, the new law required Quill to collect and remit sales taxes on the nearly $1m in annual sales inside the state. Quill sued the state and lost a ruling by the Supreme Court of North Dakota.

In 1992, the US Supreme Court overruled the Supreme Court of North Dakota, holding that a business must have a physical presence in a state in order to require the collection of sales tax. Thus, the "nexus" rule was born. 

Interesting sidenote as I digress into my childhood, 1992 also saw the creation of the amazingness called Cartoon Network.

The decision by the Supreme's was made in the technological context of 1992 and the difficulties of hand filing and paying sales tax in potentially 50 different states. In their decision, they use the interference with interstate commerce as justification for the "nexus" requirement.

Fast-forward to 2018: South Dakota is now presenting a case to the Supreme Court trying to overturn the 1992 Quill ruling by claiming the collection of sales and use tax is no longer interfering with interstate commerce. Not only would it be cool for South Dakota to overturn North Dakota's failure, but it would have an enormous impact on the coffers of local governments that collect sales tax. 

A couple of the online retailers that would pay tax if a ruling favored South Dakota are Wayfair, Newegg, and individual sales from eBay and Etsy. Also, Amazon would start collecting tax on sales made on its platform by third parties, which is estimated at almost half of their sales.

All of these users are big players, and we would expect significant revenue enhancements for our clients. Although we are hopeful the Supreme Court reverses the 1992 decision, their comments showed skepticism that the Court should take action rather than Congress. 

A decision will be announced in June, and we will follow up with all of the implications.