Reference no: EM132276787

On June 21, 2018, the United States Supreme Court fundamentally changed the rules for collection of sales tax by Internet-based retailers. In its decision in South Dakota v. Wayfair Inc., the Court effectively stated that individual states can require online sellers to collect state sales tax on their sales. This ruling overturns the Court’s 1992 decision in Quill Corporation v. North Dakota. The Quill case prohibited states from requiring a business to collect sales tax unless the business had a physical presence in the state.

For many years, states argued that they were losing a lot of money by not being able to collect sales tax on Internet sales to customers located in their states. Formerly the burden was on the customer rather than the seller to pay the relevant tax. In that case, the tax generally is called use tax rather than sales tax – and customers often simply did not pay use tax to the state.

If you are selling on the Internet to states around the country, you now will need to be aware of which states have enacted laws requiring the collection of sales tax by online sellers. In order for a given state to require you to collect sales tax, that state must pass a law allowing it to do so.

For states, this new Supreme Court decision is expected to mean the collection of substantially more money from sales tax.

For you as an Internet retailer, the decision may mean you’ll need sales tax software to keep you up to date on which states and localities collect sales tax and at what rate.

The links below take you to an article on the Internet sales tax rules in each state prior to the Wayfair decision. Some states already had laws, commonly referred to as Amazon Laws, that required larger Internet sellers without a physical presence in the state to collect and pay sales tax under certain circumstances. Other states simply relied on the default Quill rule that you could only collect sales tax on out-of-state sales from retailers who had a physical presence in the state.

1. The Wayfair decision illustrates which of these sources of American Law? Tell me which one of the areas below and explain your decision.

Sources of American Law

What are four primary sources of law in the United States?

There are numerous sources of American law. Primary sources of law, or sources that establish the law, include the following:

The U.S. Constitution and the constitutions of the various states.

Statutes, or laws, passed by Congress and by state legislatures.

Regulations created by administrative agencies, such as the federal Food and Drug Administration.

Case law (court decisions).

2. What does this decision illustrate about the principle of stare decisis (precedent)? Explain your answer.

New Internet Sales Tax Rules Explained

The days of dodging sales tax by shopping online came to an end in America, with a few minor exceptions, recently when the U.S. Supreme Court issued its 5-4 decision in South Dakota v. Wayfair Inc.

Twenty years ago, such a change in e-commerce tax rules would have sent shockwaves across the still-nascent internet. Yet the June 2018 ruling was met by almost as many yawns as screams, largely because many companies have been anticipating and preparing for the change for years.

Nevertheless, as the new internet sales tax collection and reporting rules take effect over the next year or two, state governments, consumers and smaller businesses without in-house tax compliance teams will feel some impact. To understand what the change really means, it’s helpful to take a look back at the history behind the decision.

The Pre-Tax E-Commerce Days and the Supreme Court Quill Ruling of 1992

Although the World Wide Web was officially launched in 1991, it would be hard to find enough people who shopped online that year to fill a college basketball arena. Most people didn’t even know what the internet was. Still, states recognized immediately that the looming reality of e-commerce posed a major threat to their tax revenues, especially since several early online merchants touted sales tax avoidance as a major benefit of online shopping. By 1992, the Supreme Court had already been called on to rule on internet sales tax rules in Quill Corporation v. North Dakota.

In that case, the Court ruled that a company only had to collect sales tax (and file appropriate sales tax returns) for transactions within a particular state if it had a physical presence there—a brick-and-mortar store or an office building, for example. The majority opinion spoke of a nexus between collection of taxes and provision of services. In other words, if a company doesn’t operate a facility or dispatch employees to a state, then it’s not benefiting from the infrastructure and other state services that sales taxes fund, so it shouldn’t be burdened with the responsibility of collecting those taxes.

What the South Dakota v. Wayfair Ruling Changed, and Why

If the Quill ruling initially seems fair and reasonable, consider this problem: Suppose Company A primarily conducts business online but rents a small office in Nebraska for two months a year. The office is staffed by a traveling representative (ironically, a wayfarer on behalf of the business) to service seasonal needs of clients. Sales at the office total a few hundred thousand dollars per year, while the company has an additional $1 million annually in revenues from online sales to Nebraska customers.

Meanwhile, Company B does over $10 million in online sales in Nebraska, all requiring delivery of items via Nebraska highways, but none of its more than 20,000 employees ever set foot in the state. Under Quill, Company A would have been required to collect and report sales tax on all of its Nebraska sales, including online sales, while Company B would have no sales tax obligations in Nebraska whatsoever. It’s easy to see why a number of companies viewed the rules established in 1992 as “way unfair.”

When Wayfair takes effect, almost all companies that conduct business online will need to comply with the sales tax collection and reporting laws of every state where they transact internet sales. There are a few exceptions, mostly for businesses with very few customers or very low revenues within a particular state, but for the most part, everyone is now playing by the same rules. So that must be “way fair,” right? Not necessarily, at least in the opinion of a number of smaller online retailers.

3. After reading the above, tell me whether you think the Wayfair decision way fair or way unfair? It may be your opinion, but you must state your reasons for that opinion.

Why Is Sales Tax Compliance Difficult for Small Businesses?

Many large e-tailers received the Wayfair ruling with a shrug. Their tax compliance departments had already hedged their bets by putting in place the tracking infrastructure necessary for compliance long before the case reached the highest court. In fact, a number of major online sellers started collecting sales tax on most or all taxable sales several years ago, regardless of whether they were legally required to do so.

For a small business, however, sales tax compliance poses a real challenge. Sales tax is assessed at the state, county and municipal levels, at varying percentages and with exemptions such as food and/or clothing purchases that differ from one state to the next. Not surprisingly, most of the cries that Wayfair is unfair have come from small online vendors worried about the time and costs associated with collecting and reporting sales taxes. Time has a funny way of balancing things out, however. The same advancements in computing power and speed that fueled the explosive growth of e-commerce will also make tracking transactions and assessing appropriate sales taxes far more feasible than anyone could have dreamed in the days of Quill.

How Will the Supreme Court Sales Tax Ruling Affect States and Consumers?

On paper at least, state, county and local governments will be the clear winners as the new internet sales tax rules take effect. If the estimates put forth by those who argued the Supreme Court case are anywhere near accurate, the increased tax revenues these governments have coming their way could total well into the billions of dollars each year.

As for consumers, there is good reason to believe that most of them will never give much thought to the fairness or unfairness of Wayfair at all. E-tailers who began collecting sales tax in every state in advance of the ruling have not seen any resulting decrease in sales. In the early 1990s, shoppers might have purchased online to save a few bucks in taxes, but these days, people shop online for convenience above all else.

Online Shopping: Business as Usual

As with any change in the interpretation of a law, there will never be universal agreement on whether the Supreme Court’s 2018 internet sales tax ruling was “way fair” or “way unfair.” If small businesses can weather the change successfully, the ruling will likely be largely forgotten in just a few years from now. Given how bitterly businesses and states have fought over taxing internet sales during the 26 years since Quill, that reality may be the most surprising outcome of all.

From Chapter 1 - Businesspersons must develop critical thinking and legal reasoning skills so that they can evaluate how various laws might apply to a given situation and determine the potential result of their course of action.

As you will note, each chapter in this text covers a specific area of the law and shows how the legal rules in that area affect business activities. Although compartmentalizing the law in this fashion facilitates learning, it does not indicate the extent to which many different laws may apply to just one transaction. This is where the critical thinking skills that you will learn throughout this book become important. You need to be able to identify the various legal issues, apply the laws that you learn about, and arrive at a conclusion on the best course of action.

4. Assume that you own a small retail business in Canal Park. You sell goods in the store and online. Your online sales are about 20% of your business.

Both answers must state specific things.

With the Wayfair decision in effect (that you will have to pay the local sales tax to each jurisdiction to which you sell goods to over the Internet), explain the pros and cons of continuing to sell over the Internet.

If you continue to sell on the Internet explain the issues that you must solve so that you will be able to remit the sales tax to every jurisdiction you sold goods to over the internet. Understand that you will have to charge the sales tax to each customer who purchases goods over the Internet from you. At the end of the year you will have to remit the tax you collected from customers to the appropriate jurisdiction. For example, if you have customers from Minneapolis, you will have to charge each one the appropriate Minneapolis sales tax (state sales tax plus any local sales tax) and then remit that to the appropriate place at the end of the year (state and city – each the correct amount).