Quill, Wayfair and South Dakota

If you run a business, sell to retail customers, or purchase items over the internet, the South Dakota v. Wayfair, Inc. sales tax case before the Supreme Court should be of interest to you.

History

In 1992, when the internet was just in its infancy, North Dakota took on Quill Corp, an office supply company doing business through catalogs. North Dakota wanted to force Quill and all other out-of-state sellers to collect and remit its state sales tax on sales to customers in North Dakota.  Quill prevailed by arguing that the Dormant Commerce Clause prevented states from interfering with interstate commerce unless authorized by the United States Congress.  This ruling has deterred states from forcing retailers from collecting sales tax if the seller does not have a physical presence in the state.  In-state businesses can be audited for “use” tax and forced to pay the difference between the sales tax collected and the destination sales tax.  Individuals can also be audited but it is rare.  Rather both businesses and individuals are required to self-assess uncollected sales tax and pay it to their state.

As you can well imagine the compliance with self-assessed use tax is low. It is estimated that the states are losing $13B in annual revenue.  One of the larger losers in this argument are local retailers who are at a price disadvantage as they must collect and pay sales tax.

South Dakota v Wayfair, Inc.

Ever since the Quill ruling, states have tried creative ways to force out-of-state sellers to collect their sales tax. The Supreme Court heard arguments in April in South Dakota v. Wayfair.  Should the Supreme Court rule for South Dakota, many states will immediately pass rules that comply with the findings in the Wayfair case and begin requiring out-of-state retailers with no physical presence to collect sales tax where the buyer is located.  Twenty states have similar rules on the books trying to force the collection of their sales tax by out-of-state sellers.

Larger sellers have software to facilitate the collection of multiple states/local jurisdiction’s sales taxes. Smaller sellers may not have the same tools and could be required to quickly purchase services for sales tax collection, obviously creating a burden of compliance.

This issue recently triggered an email from eBay to all eBay sellers urging the sellers to sign a petition calling for Congress to provide legislative relief should the Supreme Court rule in favor of South Dakota.

What should you do

First, be prepared to pay higher sales taxes as an individual. Second, understand your firm’s sales tax data collection and reporting capabilities.  Make sure your sales tax exempt customers have provided the proper exemption certificates.  Discuss the situation with your CPA and financial advisor and begin exploring software options.  Many software options are on the market.  For QuickBooks users, I prefer Avalara as they offer national rates, tax return filing services and the tracking of exemption certificates.

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