Supreme Court Bolsters Local Tax Enforcement with South Dakota v Wayfair Ruling

In a very recent ruling, the Supreme Court of the United States made its first major movement on taxation of goods purchased from internet retailers since 1992, effectively casting aside its previous position.

In the early 1990s, the Court barred states from collecting sales taxes from retailers, unless those entities had a substantial connection to the state (Quill Corporation v North Dakota). Now, through South Dakota v Wayfair, the Court has updated its thinking on an industry that at the time of Quill had sales of a few hundred million dollars—Wayfair generated $4.3 billion in 2017 revenue.

Justice Anthony Kennedy estimated revenue shortfalls by the states to be as high as $33 billion and now, with the Supreme Court’s decision in Wayfair, the doors are now open for states to update its legislation to determine what and when a “substantial nexus” occurs with an online businesses. It will be interesting to see the thresholds and which states move quickly. Likely, we won’t see states requiring a physical presence in order to collect sales tax.

Another interesting point focuses on our own responsibility as citizens to self-report the taxes we pay on internet purchases.  I think back to younger law school and living in New York City days, and watching the news the day after Thanksgiving. There was a reporter at the Paramus Mall in New Jersey, following New York State tax authorities in the background writing down license plates. One representative said NYS would be sending letters to the registered owner of the cars letting them know that they are obligated to pay taxes on their purchases even though were shopping in NJ.  I never learned how well this actually worked and how much, if anything, NYS state actually collected from these efforts. It is clear, however, that individuals are generally content not to self-report.

The Wayfair decision was, as many cases before the Court seem to be, a 5-to-4 split. I often find dissents to be very interesting. Chief Justice John Roberts, in his dissent, aptly commented that “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” From my perspective, the ruling goes to the heart of capitalism, but aside from the tax avoidance issues the states face, maybe this ruling will work towards leveling the playing field even a little bit and allow brick-and-mortar stores to remain open. While I do enjoy Amazon, I also like to go to a brick-and-mortar bookstore, for example, and buy a local cookbook or hear an author speak. Would we be a better society if these opportunities completely ceased? I don’t think so.

Just like I enjoy going into bookstores, I also like to try on my clothes. Bonobos was originally envisioned as completely on-line without a brick-and-mortar presence. I was in the apartment/first “warehouse” of founder Andy Dunn a few months after I incorporated the company and we were in the process of its first financing. I stood in front of so many pairs of amazing pants and tried to envision how this would work completely online. For me it took a number of years before I actually didn’t go into Bonobos’ headquarters and try on clothes and have them shipped to Seattle (no tax at the time). By the time I shifted to the internet, the company made a decision to add its Guide Shops, their version of brick-and-mortar concept where you can try almost anything on, but you place your order and it gets shipped to you (just like if you placed the order online).  With the Guide Shops though I was “stuck” paying Seattle tax for years even if I was in one of the New York stores where my purchase would have been under the threshold to collect tax. I got used to it. I was in New York this past May and made my way to my favorite Guide Shop and put an order together. At the bottom of the invoice I was charged tax. I, of course, asked why only to be reminded that Bonobos opened in Raleigh. I wouldn’t trade the experience for the tax savings (or at least I recognize that I can’t escape it).

We will have to see what happens in each of the states and there is no telling how quickly this may happen. Likely there will be an effect on businesses. If you need consultation on matters related to tax compliance and other strategies to build an online business, contact us at the firm today.