As we wait for a decision in the Wayfair v. South Dakota Supreme Court Case regarding online sales tax, we thought it would be fun to take a look at possible outcomes depending on how the Court rules.
Our Opinion on the Online Sales Tax Case
Back in March we shared our predictions on how the online sales tax case’s outcome would affect businesses.
What if the Supreme Court rules against South Dakota? We’re back where we started with Quill remaining the physical presence standard and states passing various legislation that’s either unconstitutional (and likely not upheld) or that requires onerous reporting.
What if the Supreme Court rules in favor of South Dakota? This would effectively reverse Quill, potentially leading to economic nexus becoming a viable threshold for creating nexus, companies selling more than a certain dollar amount needing to collect sales tax in many more states, retroactive sales taxes and more.
Read more details about our predictions in this blog post.
Other Opinions on the Online Sales Tax Case
Here are a few additional predictions we agree would likely come into play.
Smaller Companies Would Be Hit Hard
In addition to needing to increase prices, it would become very difficult to figure out how to actually collect the sales tax for each jurisdiction in the United States – there are more than 10,000 of them. While software can help, the issue is more complicated than just the sales tax rate for each jurisdiction. The ways products are classified vary between states and municipalities.
As Etsy CEO Josh Silverman explains, “The challenge isn’t that one can create software that compiles each of their hundreds of different classifications. Software can do that, but mapping hundreds of product classifications over tens of thousands of jurisdictions to each individual seller’s products is exceptionally difficult…it’s an incredible burden for the sellers to do that.”
The National Review also points out several potential ways the Court’s decision could impact small business owners:
- If Quill is overturned, all companies would need to keep up with states’ laws, rules and court cases regarding sales tax. Large businesses already invest a lot of resources into this as tax codes are constantly changing.
- If companies don’t collect the sales tax for each transaction, they become liable. Any mistake could be costly for the business owner. In addition, sales tax isn’t the same as income tax. “It is considered a trust fund held by the business. This means that a business and the owners are subject to harsh civil and criminal penalties that can’t be extinguished by bankruptcy.”
- Companies would be subject to, “Expensive, multi-year sales-tax audits — on average, eight audits per year. The average sales-tax assessment for even a medium business under audit is over $100,000.”
- Should the Court choose to overturn Quill, companies will need to raise prices, “To account for the administrative burden and risks associated with collecting sales tax throughout the country. The inflationary effects will be felt by everyone.”
Online Marketplaces Would Need to Update Their Practices
As it is now, online marketplaces like Amazon and Etsy provide a place for third-party sellers to reach consumers around the country, however sales tax isn’t often collected on these transactions. Should Quill be overturned, the company that owns the marketplace could be responsible for collecting and remitting sales tax for all transactions that take place on the website.
As the Institute on Taxation and Economic Policy (ITEP) explains, “Washington State and Pennsylvania have already implemented this approach successfully, with Amazon and other companies starting marketplace sales tax collection earlier this year…while it is not yet clear what, if anything, the Court will have say about online marketplaces in particular, it is very likely that more states will pursue mandatory marketplace tax collection should the Supreme Court overturn Quill.”
More Local Legislation Will Come Into Play
Because many localities don’t have a system in place to collect sales tax from out-of-state purchases, states and municipalities will need to update their policies. In addition to implementing local use tax, this would mean the addition of ‘destination-sourcing.’ ITEP explains this as, “Where the tax charged is based on the location of the buyer, rather than the e-retailer’s warehouse.”
In addition, Congress may require that states and localities make their sales tax code simpler and more uniform across the country. As ITEP explains:
For years, Congress has contemplated allowing states and localities to require sales tax collection by out-of-state online retailers, on the condition that they take steps to make tax calculation, collection, and remittance simpler for sellers. But bills such as the Remote Transactions Parity Act (RTPA) and the Marketplace Fairness Act (MFA) have repeatedly failed to advance…their likelihood of passage could increase as a result. If either of these bills is enacted, states will move quickly to meet the simplification requirements, which include creating uniformity across state and local tax bases and ensuring that online retailers only have to deal with one entity within each state for issues related to sales tax administration and auditing. And even if federal legislation does not make it to President Trump’s desk, states and localities may still find themselves having to enact laws to fulfill any simplification requirements that the Court chooses to endorse in handing down its decision in Wayfair.
We are certainly interested to see what the Supreme Court decides regarding this case! A decision is expected in June.
In the meantime, please contact us if you have any questions about how online sales tax, nexus or other multi-state tax issues may affect your business. We’re happy to help!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
