By Daryl Petrick
In the case of South Dakota vs. Wayfair, the United States Supreme Court may have opened a Pandora’s Box of tax compliance problems around the world as states seek to collect taxes they believe are due to them.
South Dakota sought to force the online seller Wayfair to collect its 4.5% sales taxes on behalf of the state. Brick-and-mortar merchants have long complained about the ability for customers to effectively obtain a discount by purchasing the items over the internet from companies that did not pave a physical presence in South Dakota, as the brick-and-mortar stores were mandated to collect sales taxes from customers for in-store purchases, and internet retailers were not. Although individual internet purchasers are required to self-report taxable items they buy from out-of-state retailers, this self-reporting is virtually non-existent. Wayfair argued that it did not have an obligation to collect South Dakota sales tax because it did not have any property or employees in the state. The Supreme Court ruled in favor of South Dakota in Wayfair, meaning that company and others similarly situated now have the obligation to collect and remit South Dakota taxes, no matter where they are located—domestically or abroad.
Other state legislatures have seized upon this ruling as a way to help balance state tax budgets. As internet-based shopping has taken hold, states have sensed that their taxable base has eroded in favor of remote online retailers. This ruling thus gives a boost to states who view sales tax underreporting as a major issue and provides a quick source of revenue. California has indicated that they plan to copy South Dakota’s law almost immediately.
The fallout of the Wayfair decision puts the burden onto sellers into a particular jurisdiction to be aware of their obligation to collect sales tax from their customers. The good news is that not all states currently have a sales tax—shoppers in the relatively unpopulated states of Oregon, Montana, New Hampshire, Delaware, and Alaska are currently free of sales taxes. The bad news is that unique local district taxes in all of the other states have more than made up for the lack of taxes in these five states. In fact, although only 31 states currently tax internet sales, it is estimated that there are nearly 10,000 separate sales tax jurisdictions located in the United States, with Texas having over 1,500 all by itself.
What’s a company to do when faced with the potential of having to manage 10,000 separate tax systems? Business interests are attempting to influence Congress to intervene to regulate this potential compliance nightmare. Although we might see Federal legislation to try to control this situation, a polarized Congress will struggle to find common ground especially under the non-regulatory framework that has been a hallmark of the Trump administration. The Court’s ruling specifically noted that South Dakota’s tax was relatively easy to compute and remit using specialized software. It is thus likely that companies will soon be required to obtain software that monitors unique tax requirements for each customer.
Foreign retailers are especially cautioned that U.S. tax treaties do not prevent states from taxing sellers from out of the country, nor do the permanent establishment rules prevent sales tax collection.
On the horizon is yet another Wayfair-related issue—the ability for states to collect income taxes based solely upon sales rather than the physical presence that has been required to date. We have an eye on this issue as well, as states may respond with aggressive income tax collection based upon sales.
We look forward to assisting you with your compliance issues, and planning to minimize your tax burden. If you have state sales or income tax questions regarding any U.S. jurisdiction, please reach out to us at Bowman & Company, LLP to assist you. (209) 473-1040