Before this significant Supreme Court ruling, the prevailing law was determined in the 1992 case of Quill Corp v. North Dakota. In that ruling, the Court said that a business had to maintain a physical presence in a state in order to be responsible for collecting and remitting sales tax in that state. Because that case occurred in 1992, before the internet sales market was really established, states have been arguing that the physical presence standard is outdated. As time has passed and internet sales have boomed, this has created an unfair advantage for internet retailers who do not have to charge sales tax on their web sales, as opposed to brick-and-mortar businesses who do. States have also lost out on billions in sales tax collections on those internet sales. While states should have technically been collecting use tax from the customers on these out-of-state sales, the use tax is hard to enforce. Businesses who make out-of-state purchases are more likely to comply with use tax laws, but individuals are largely unaware of the use tax laws, so most use tax goes uncollected.
While this case ruled only on the sales tax laws of South Dakota, many expect this ruling to result in many states changing their sales tax rules to include sales where a retailer does not have a physical presence in that state, which could increase the sales tax compliance burden of many companies with internet based sales. This could create a hardship for these businesses, as the sales tax rules for what types of transactions are taxable, tax rates, and remittance are different among many states. Each state could also set their own sale and transaction thresholds for collecting and remitting sales tax to states in which a business has no physical presence. This may not impose such a hard burden on an internet based sales company such as Amazon, which many argue is capable of keeping up with all of the different rules. However, depending on how low states set their sale and transaction thresholds, this could place a large administrative burden on small- and medium-sized businesses with internet based sales.
The winners in this case will be the states, which could now open themselves up to billions of dollars in additional revenue, and brick-and-mortar businesses, who have taken a large hit recently because of the prevalence of online sales. However, some do not expect a large shift in buying habits, as the convenience factor of making purchases online could still outweigh shopping in traditional brick-and-mortar stores, even as the playing field is leveled in regards to sales tax.
If your business sells to customers in states in which you are not currently collecting and remitting sales tax, you could be subject to the sales tax laws of those states now or in the near future as states change their laws as a result of the Way Fair case. Let us know if would like our help monitoring the sales tax laws of other states.