For nearly two decades, the question of whether to collect sales tax on Internet-based purchases has been a point of concern at the state level. Especially in cash-strapped states, where tax revenue has declined as the percentage of retail purchases online has increased, many have wondered what it will take before we have a standard for Internet sales taxes.
South Dakota recently passed a new sales tax law – Senate Bill 106 – designed to push the conversation forward, intentionally provoking the 1992 Supreme Court decision in Quill v. North Dakota regarding the constitutional nature of sales tax nexus.
This particular ruling, which has been the basis for most modern sales tax nexus laws and how most states collect tax on in and out of state purchases, stated that the U.S. Congress has sole discretion to regulate interstate commerce. In effect, all this ruling meant was that sales tax across state lines needed to be addressed at the federal level. It by no means ruled out the ability of states to collect that sales tax – it just relegated the legalities to Congress to deal with. Which they have not.
As such, South Dakota’s new law is designed to force the courts to consider whether it has the right to charge sales tax on purchases made online across state lines.
What the South Dakota Law Does
The new South Dakota law requires some out-of-state retailers to report and collect sales tax on purchases made by individuals in the State of South Dakota, regardless of nexus. The law applies to anyone with more than $100,000 in sales in the state or 200 or more transactions.
The law, which just went into effect at the end of April, is one of the first in the country to directly challenge the 1992 Supreme Court ruling on this very topic. This is a ruling, it should be noted, that was issued before eCommerce became a nearly $6 trillion industry in the United States with over $703 billion in B2C eCommerce sales in the US alone.
Because of the law, legal challenges are already pouring in. NetChoice, an organization that represents several large online companies including eBay, Google, Facebook, and Overstock (all of which are affected by the new law) has already filed suit, claiming the new law is unconstitutional. The American Catalog Mailers Association has joined in the suit, asking a State Court judge to rule on the legality of the new law.
What This Law Means for Online Sales Tax
This case is of particular interest because it represents a direct challenge to the status quo in sales tax collection for online purchases. The 1992 ruling has been the standard for nearly 25 years and is the benchmark by which all current sales tax laws are drafted.
Yet, there has been rumbling for some time about the sheer volume of online purchases (which has grown every year since 2000, as the Internet has become a part of our daily lives). Recently, Supreme Court Justice Anthony Kennedy even made remarks about this very issue, stating that “the Internet has caused far-reaching systemic and structural changes in the economy, and indeed in many other societal dimensions. Although online businesses may not have a physical presence in some states, the Web has, in many ways, brought the average American closer to most retailers.“
While no case has yet been brought to the Supreme Court level, the interest is there to discuss the matter – one that has not been reviewed in a long time.
So what happens if the law is left to stand by the courts? While court inaction wouldn’t necessarily change the law, it would embolden other States to pass similar laws. If the courts overturn the new law, up to and including the Supreme Court, the law will go the way of many attempts by State governments to address this issue, but if they uphold it, it will open the door to standard sales tax being charge on all online purchases, something many states have been hoping for for some time.
When Will This Be Decided?
Even with the law only two weeks old, there are already several lawsuits filed that could see it reach the Supreme Court in the next 1-2 years. The first, filed by NetChoice, challenges the legality of the new law under the 1992 ruling. The second, filed by the State of South Dakota, addresses the failure of four online sellers, including Overstock and Newegg, to register with South Dakota to collect sales tax according to the new law.
One way or another, it is likely we will soon see this issue addressed by the high court, and when that happens, we may finally get an answer to the modern issue of how online sales should be handled.