Good news — for everyone except those tactical retailers with online stores and those who sell entirely online — the U.S. Supreme Court ruled recently that states can require internet retailers to collect sales taxes. Yes, no more collecting sales taxes only where a business has “nexus.”
The Supreme Court’s 1992 decision in Quill Corp. v. North Dakota effectively barred states from imposing sales tax collection obligations on remote retailers by requiring a non-trivial, physical in-state presence, so-called “nexus,” in order to make them collect and remit buyers’ sales taxes on purchases.
Now, with a 5-4 decision in South Dakota v. Wayfair, the court broke with earlier rulings that barred states from imposing sales taxes on purchases their residents made from out-of-state retailers. Although a number of states are scrambling to pass legislation in order to take advantage of the Supreme Court’s ruling, this decision was a victory only for South Dakota, which had asked the court to uphold its new law imposing an internet sales tax.
Celebrate or Mourn?
The 9,988 sales tax jurisdictions anticipate billions of previously uncollected sales tax dollars will soon begin flowing into their coffers. Among those celebrating:
* Brick-and-mortar businesses. According to the court, the physical presence rule put brick-and-mortar businesses at a disadvantage because they had to charge sales taxes while internet retailers did not. That rule “prevented market participants from competing on an even playing field.” The Supreme Court decision theoretically levels the playing field for all retailers, especially those with no internet presence.
* Software startups and accountants. All retailers, big and small, must now look to software vendors to efficiently solve the increased complexity of sales tax collection.
But not everyone will be pleased with the Supreme Court’s ruling, especially:
* E-commerce retailers. Large e-commerce retailers and remote sellers who previously enjoyed a long tax holiday must now collect taxes such as Amazon and many other e-commerce retailers have long done. That effectively raises their prices, which in turn could eliminate their low-cost advantage and reduce sales.
* Small online businesses. Small online sellers will see added costs for compliance, including specialized software, accounting fees and administrative expenses associated with sales tax collection. And don’t forget, the potential risk of more sales tax audits.
* Individuals. The Supreme Court’s decision has increased the cost of internet purchases.
The most efficient way to ensure the shooting sports and tactical equipment business is sales-tax compliant is to utilize software with cloud-based, automated features that automatically apply the correct sales tax based on the goods or services purchased and the shipping location of the customer.
Keep in mind that while other states may pass the legislation that permits them to jump on this bandwagon, this ruling involved only South Dakota’s sales tax collection policy. States such as South Dakota that are heavily dependent on sales tax revenue will obviously benefit the most, although Louisiana, Tennessee, South Dakota, Oklahoma and Alabama will, in all likelihood, eventually see the biggest increase in revenue.
South Dakota estimated the states could pick up combined sales tax revenue of $34 billion a year if the court allowed them to tax internet sales. The General Accounting Office, on the other hand, estimated the number would be, at most, $13 billion.
The Dakota Case
The Supreme Court ruled that the physical presence standard from the earlier Quill Corp. v. North Dakota (1992) is “unsound and incorrect.” That means states are allowed to tax businesses that don’t have a physical presence in the state.
However, before South Dakota can enforce its economic nexus law, the State’s Supreme Court must approve it in a way “not inconsistent with” the U.S. Supreme Court’s ruling. As written, the South Dakota law requires a remote seller to collect and remit sales tax if the seller meets either of the following criteria:
*“The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically or services delivered into South Dakota exceeds one hundred thousand dollars, or
* “The seller sold tangible personal property, any product transferred electronically or services for delivery into South Dakota in two hundred or more separate transactions.”
Collecting for the Man
Obviously, every tactical retailer acting in their capacity as sales tax collector must pay over to the taxing jurisdiction the tax on all sales upon which the tax is levied — regardless of whether it’s actually collected or not. Any retailer caught not collecting sales taxes must pay those amounts from its own pocket.
Small tactical retailers have greater compliance risk, especially those with a large proportion of sales from the internet, because they can’t afford the software necessary to manage sales, CRM or even shipping. Now might be a good time to think about evaluating and improving sales tax compliance regardless of the current rules or where they may stand in the future.
While upholding South Dakota’s sales tax collection requirements, the Supreme Court re-affirmed its four-prong Commerce Clause. Under the 1977, Complete Auto Transit, Inc. v. Brady ruling, a tax will withstand scrutiny if it: “(1) applies to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides.”
The former nexus standard in both Quill and the current Wayfair situations tested the first prong of the Commerce Clause that some physical presence within a state was necessary for requiring out-of-state retailers to collect and remit sales taxes.
In the latest, Wayfair, the Court noted that the first prong has been satisfied because they carry on a significant quantity of business in the state and have an extensive virtual presence. Under South Dakota’s new sales tax law, retailers lacking a physical presence in the state are required to collect and remit sales tax when they have more than $100,000 of sales or 200 separate sales into the state annually.
Labeling the earlier Quill ruling as a “judicially created tax shelter,” the Court said the overturn of Quill may necessitate a “case-by-case analysis of purposes and effects” in making the substantial nexus determination — something fulfilled by South Dakota’s $100,000 of sales or 200 transaction requirements.
The Supreme Court didn’t ignore the concerns of small businesses and the barrier to market entry presented by sales and use tax compliance. Not only does the South Dakota ruling point out that it “requires a merchant to collect the tax only if it does a considerable amount of business…” as the Court pointed out, since South Dakota is a Streamlined Sales Tax (SST) state, the compliance burden would be reduced. But what is SST?
Many businesses providing products and accessories for tactical shooters — even those who provide only services — already find themselves required to collect sales taxes for the jurisdictions in which they operate. The exceptions are businesses in Delaware, Montana, New Hampshire or Oregon, which have no sales taxes. While the sales taxing jurisdictions create new laws requiring the collection of out-of-state sales taxes — a unique multi-state pact is already helping many retailers meet their sales tax collection requirements.
A number of state tax authorities have already come together to make it easier for every tactical retailer to “voluntarily” collect and pay sales taxes on sales to customers in those areas where they may or may not have nexus. Designed primarily for catalog and internet sales, the multi-state Streamlined Sales Tax Agreement has simplified sales tax rules for tactical products and accessories retailers operating in any of the 24-member states.
Among the incentives offered under this multi-state pact: Easy signup, one-source for signing up with multiple states, simplified rules, discounts or commissions and a unique amnesty program.
Streamlined Sales Tax Organization: www.streamlinedsalestax.org
Multi-State Tax Commission: www.mtc.gov/Resources
Easing the Burden
South Dakota concluded the growth of online sales changed the market dramatically, so it passed a law requiring all but the smallest retailers, including internet companies, to collect taxes on the sales they made in the state — even those with no physical presence there.
The Supreme Court’s ruling opens the door to new revenue streams to fill state coffers while imperiling the competitive advantage many internet businesses had over brick-and-mortar rivals already required to collect sales taxes. In all likelihood, the ruling in the South Dakota case will lead other states to try to collect sales tax on purchases from out-of-state online businesses more aggressively. It is also likely to lead to consumers paying more at the online checkout.
As if sales tax collections weren’t difficult enough with different taxing jurisdictions taxing different products, goods and services, the U.S. Supreme Court has opened the door to more states demanding sales taxes being collected on out-of-states sales.
While many tactical retailers and other business owners are turning to sales tax experts for help, keeping an eye out for both new sales tax laws and even the potential for federal legislation is more important today than ever.