By Christopher Nyenhuis
“[I]n this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin.
Until recently, however, paying states sales tax on items purchased over the internet was largely avoided. But no more. In a June 21st decision, the Supreme Court of the United States held that states can require internet sellers to collect sales tax even if the seller has no physical presence in the state seeking to collect the tax. As a result, even if your company is only located in Michigan, it can be required to comply with the sales tax collection practices of every state where customers purchase your company’s products or services over the internet.
South Dakota v. Wayfair et al. began when South Dakota—which does not have an income tax and relies on collecting sales tax to generate revenue instead—passed a law requiring merchants who deliver over $100,000 of goods or services into South Dakota to collect sales tax on internet purchases. But previous Supreme Court decisions held that merchants were only required to collect sales tax in states in which they had a physical presence. With the advent of internet sales, South Dakota claimed that missing out on the sales tax for internet sales would lead to the state’s financial ruin. Retailers who have no physical presence in South Dakota, but who sell into it, sued to block the law.
The Court devoted much of its opinion to tracing the development of the Constitution’s Commerce Clause jurisprudence and explaining where the rule that a physical presence in a state is required to collect sales tax came from. It then analyzed the modern economy and examined how the physical presence requirement is incompatible with the Internet Revolution. Because the old physical presence rule “ignore[d] the substantial virtual connections” between a merchant and a state, the Court held that it should no longer apply.
So where does that leave merchants who sell goods and services over the internet? It means that, if you sell goods or services over the internet, you should expect to collect sales tax for every state that imposes one. Of course, complying with 50 states’ individual sales tax requirements can be burdensome and complicated (even the Court recognized this). Most companies, however, should be able to utilize software solutions currently on the market or that will be developed after the Court’s decision. In any event, it will be critical for companies selling goods and services over the internet to be mindful of their tax collection obligations beyond the state(s) in which they are physically located.