Paying Sales Tax on Out of State Purchases

Sheri Evans
April 16, 2018

But many other smaller retailers don't collect sales tax unless they have a physical presence in the state where the buyer lives, relying on a 26-year old Supreme Court decision that was related to catalog retailers.

"I think you're going to see a flood not only of demands for ongoing tax collection but retroactive audits", said Andy Pincus, a Washington lawyer who filed a brief on behalf of EBay and a group of small businesses that oppose the states. But other online sellers, from 1-800 Contacts to home goods site Wayfair, can often sidestep charging the tax.

A ruling favouring South Dakota could help small brick-and-mortar retailers compete with online rivals while funnelling up to $18 billion into the coffers of the affected states, according to a 2017 federal report.

Big retailers like Amazon and Walmart collect sales tax on all online sales in the 45 states with a statewide sales tax.

Additionally, independent businesses on websites like Etsy and Ebay would be included in a rewritten sales tax law, as well as third party merchants that operate in Amazon's global marketplace, which totaled almost two-thirds of the company's gross merchandise volume at $313.4 billion. If they have to start complying with the complexities of collecting and remitting sales taxes nationwide, many could be forced to abandon that part of their business.

States would capture more of that tax if out-of-state sellers had to collect it, and states say software has made sales tax collection simple.

The court showdown instead involves Wayfair, Overstock and Newegg, three retailers sued by South Dakota for not charging taxes to consumers there.

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Under a 2016 law, South Dakota requires retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases.

South Dakota says the high court's previous decisions don't reflect today's world.

Major retailers that have brick-and-mortar stores, and therefore already collect taxes, are represented by industry groups that back South Dakota.

It's unclear how the justices might align on the question this time. The court reaffirmed that ruling in 1992. Gorsuch, who recently marked his one-year anniversary as a justice, suggested skepticism about Quill as an appeals court judge. It "has no basis in the Constitution and has proved unworkable in practice", he wrote.

Amazon, which is not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not collect taxes for items sold on its platform by third-party venders, constituting around half of total sales.

But Congress also could have acted any time since 1992. The court first adopted its physical presence rule on sales tax collection in a 1967 case dealing with a catalog retailer.

The case is South Dakota v. Wayfair, 17-494.

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