On Thursday, the United States Supreme Court ruled that states may require online retailers to collect state sales tax in states where the retailer has no physical presence. The case before the Court involved a South Dakota statute that required all merchants to collect a 4.5% sales tax if their sales volume exceeded $100,000 per year.
The decision was a 5-4 ruling, with Justices Kennedy, Thomas, Ginsburg, Alito, and Gorusch joining in the majority. Chief Justice Roberts was joined in the dissent by Justices Kagan, Breyer, and Sotomayor.
A Changing Landscape
The ruling overturns the Court’s 1992 decision in Quill Corporation v. North Dakota, where it held that the Constitution prohibited states from imposing sales tax obligation on sellers who had no physical presence in the state.
Traditional brick-and-mortar stores have argued for a while that their sales tax obligations put them at a competitive disadvantage to online retailers. Meanwhile, states have argued that they are missing out on billions of dollars in desperately needed revenue.
In prior opinions, Justice Kennedy indicated that the Quill ruling had harmed states far more than expected. Writing the majority opinion in this case, Justice Kennedy cited the explosion of online retail since the Court’s 1992 ruling, noting that online sales were recently estimated to total $453.5 billion. He observed that the 1992 ruling severely harms states and that “solvent state and local governments” were necessary for a flourishing economy.
Kennedy noted that their decision does not address two issues that were not before the Court: (1) whether the states can seek sales taxes retroactively; and (2) whether small retailers with scattered sales could be exempt from the law. The dissent voiced concerns that it would stifle small businesses, who would be unable to navigate the complexities of sales tax laws and regulations. Some have commented that the law is favorable to small businesses, in light of the fact that the Court declined to comment on the $100,000 threshold.
What This Could Mean for Your Business
Obviously, the biggest implication for online retailers is that you no longer have to be physically located in a particular state to be subject to its sales taxes. However, most states don’t currently have a law that specifically obligates you to collect those taxes, so you can expect legislative action on that point.
As the law catches up to today’s ruling, you’ll need to be aware of and comply with sales tax obligations in whichever states you do business in. This may require familiarizing yourself with the complexities of taxes such as the examples cited by the dissent – for example, in Texas, plain deodorant is taxed, while deodorant with antiperspirant is not.
Whether states can retroactively collect taxes is also a concern, and you should be on the lookout for state legislation on that point.
Silicon Valley Start-Up and Small Business Attorney
Kalia Law P.C. helps small businesses and start-ups grow and flourish. We can keep you updated on the current state of the law and help you navigate these complicated issues. To schedule a consultation with attorney Claire Kalia, call us today at 650-701-7617 or send us an email.