In the wake of the Supreme Court’s decision in South Dakota v. Wayfair, Inc., states have moved in quickly to tax online sales. Please discuss whether you think it is now more or less likely that Congress will enact legislation that prohibits states from requiring out-of-state corporations to collect and pay taxes for online sales. Can you think of any other changes in the law that Congress may want to make that would impact online sales?

Learning Goal: I’m working on a business law writing question and need an explanation and answer to help me learn.

Taxing Internet Purchases

In 1992, the United States Supreme Court ruled that an individual state cannot compel an out-of-state business that lacks a substantial physical presence within that state to collect and remit state taxes. Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). The court determined that Congress has the power to pass legislation requiring out-of-state corporations to collect and remit state sales taxes, but it has not yet done so. Only online retailers that also had a physical presence within a state were required to collect state taxes on Internet sales made to residents of that state. As a side note, state residents are supposed to self-report their purchases and pay use taxes to the state, but they rarely do (If you have ever filed a California tax return, they now ask you to self report use taxes, but again most people ignore it).

For example, in the picture above Tom Cruise is making an online purchase after the Quill decision (note the CRT monitor). Because he is purchasing product from a company outside of the state, he is not obligated to pay any sales tax on that transaction.

THE UNITED STATES SUPREME COURT REVISITS THE ISSUE

In 2018, in South Dakota v. Wayfair, Inc., the United States Supreme Court overruled its earlier decision in Quill and opened the door to state taxation of online sales. The South Dakota legislature had enacted a statute that required certain out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state.” The law applied only to sellers that annually sell more than $100,000 worth of goods or services within the state. South Dakota then sued three large retailers, Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., for failing to collect taxes as required under this law. The lower courts and the state’s highest court ruled in favor of the retailers because of the Court’s precedent requiring physical presence.

When the case reached the Court, however, the justices reexamined the earlier decision, and five out of nine of them chose to overrule it. The majority found that the case’s focus on physical presence created an “online sales tax loophole” that gave out-of-state businesses an advantage. The justices concluded that in today’s online environment, physical presence in a taxing state is not necessary for the seller to have a substantial connection with the state.

Chief Justice John Roberts wrote the dissenting opinion. He noted, “E-Commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”

In response to the decision, 44 states, including California require the collection of sales taxes on online sales. Below is Tom Cruise making a recent online purchase (note the CRT monitor is gone) where he needs to also pay sales tax.

QUESTION PRESENTED

In the wake of the Supreme Court’s decision in South Dakota v. Wayfair, Inc., states have moved in quickly to tax online sales. Please discuss whether you think it is now more or less likely that Congress will enact legislation that prohibits states from requiring out-of-state corporations to collect and pay taxes for online sales. Can you think of any other changes in the law that Congress may want to make that would impact online sales?