Online Sales Tax

Online Sales Tax in the United States

In the case “South Dakota v. Wayfair,” No. 17-494, Justice Kennedy’s opinion states:

“That said, South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. S. B. 106, §5. Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability. See App. 26–27. Any remaining claims regarding the application of the Commerce Clause in the absence of Quill and Bellas Hess may be addressed in the first instance on remand.”

South Dakota v. Wayfair, Inc. is about the constitutionality of a South Dakota law requiring collection of the state’s sales tax by internet vendors with at least 200 transactions or $100,000 in sales to South Dakota residents. In November 2017, the Tax Foundation had filed a friend-of-the-court brief asking the Court to take the case, and the Court agreed to do so on January 12, 2018.

The U.S. Constitution’s Commerce Clause has been interpreted to forbid state taxation that excessively burdens or discriminates against interstate commerce. Petitioner South Dakota seeks to reverse the Quill decision of 1992, which held that states cannot force sales tax collection by vendors who do not have personnel or property in the state (the “physical presence” standard). Respondents Wayfair, Inc., et al., seek to retain the Quill decision.

Many current state enactments, including “click-through nexus” laws in 22 states (nexus based on referral links from in-state websites), “notice-and-reporting” laws in 10 states (reporting burdens on entities with no nexus), economic nexus laws in three states (disregarding any nexus limits), and proposals for “cookie taxes” (nexus based on placing website cookies on in-state computers) violate this standard. But the South Dakota law may be constitutional because the state minimizes the burden of its sales tax collection to the extent practicable, by:

Adhering to interstate standards of sales tax administration;
Requiring uniformity between state and local sales tax bases;
Minimizing number of local sales tax rates, which in South Dakota must be either 1 or 2 percent;
Taxing virtually all final retail transactions under its sales and use tax, without arbitrary exemptions or confusing special tax rates;
Adopting a meaningful de minimis threshold likely to exclude interstate activity where state burdens exceed state benefits, and
Barring retroactive collection.

In addition, the state does not discriminate against interstate commerce, subjecting out-of-state retailers to the same taxes paid by in-state retailers, and the statute’s sales and use tax applies only to South Dakota’s fair apportioned share of interstate commerce, purchases made by South Dakota residents not taxed by any other state.

Already, a majority of states have disregarded constitutional limits on their sales tax powers. Absent Court or congressional action, this trend will continue, creating the scenario that the Commerce Clause sought to avoid: states subjecting interstate commerce to death by a thousand cuts. We hope the Court resolves this almost universal lack of clarity about the proper scope of state sales taxation of out-of-state entities, with meaningful limits of state taxation of interstate commerce.