E-commerce businesses are in for a major headache as states and localities scramble to interpret South Dakota v. Wayfair—last month’s U.S. Supreme Court decision allowing states to collect sales taxes on online purchases from remote sellers.
The 5-4 decision upended the 1992 Quill Corp v. North Dakota standard that sellers are required to collect sales taxes only in states where they have a physical presence. The Wayfair ruling now gives all states and local taxing authorities the jurisdiction to collect sales taxes from any business that has a virtual presence within its boundaries, according to Kean Miller tax attorneys who gave a briefing on the ruling this morning.
The Supreme Court decision, however, did not set a new standard—it simply overturned the “physical presence” requirement and left it up to the states to decide if and how they will collect sales tax on online purchases.
“It’s a brave new world,” says Jason Brown, a Kean Miller partner on the state and local tax team. “Businesses will have to figure out what every state they sell into will require. It could very well be a hodgepodge of different standards depending on where the customer you’re selling to is.”
The new rules under the ruling are based on the dormant Commerce Clause, which says state regulation may not discriminate against interstate commerce and that states may not impose an undue burden on interstate commerce. States will now have to decide what exactly falls under undue burden, says Kean Miller partner Jaye Calhoun.
The biggest burden will likely fall on small online retail businesses that may not have the capital to invest in software, personnel and tax experts to help them navigate the new sales tax rules state by state, the lawyers say.
Many states are currently allowing a grace period for businesses and government entities to negotiate how the new sales tax rules will be enforced moving forward.
“Right now, Wayfair and South Dakota are negotiating a settlement. Everything is developing right now on the ground,” says Kean Miller special counsel William J. Kolarik II.
Meanwhile, e-commerce businesses are trying to determine how much of their competitive advantage will be lost now, compared to brick-and-mortar retail establishments, Kolarik says. Some businesses are exploring whether it makes sense to move to some tax-inclusive pricing or to just pay the tax themselves instead.
Louisiana will likely be a particularly difficult state for online retailers to do business in now because it does not have a uniform state tax collection system. Parishes and local entities collect their own taxes as well as the state, so every single one of those entities will now have nationwide taxing jurisdiction when it comes to online sales, Calhoun says.
“Louisiana’s tax system is already extremely complicated,” Brown adds. “This will only make it more complicated.”