Your E-Commerce Business, State Sales Taxes, And The Supreme Court

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E-commerce has changed forever since the Supreme Court Decision of June 21.  Just as we began planning on e-commerce as a summer spotlight topic, big news broke.  This news will change taxes and business on the Internet in the foreseeable future. The Supreme Court has made a landmark ruling on the right of individual states to assess sales tax for e-commerce and online businesses.

Supreme Court Reverses the Quill Stand

The ruling almost marks the end of an era: Online businesses will never again have the Wild West wide open spaces of freedom from state sales taxes, as it did in the early pioneer days of online shopping. Gavrilov & Co invites you to read on to learn more about mysteries created and the mysteries caused by this new Supreme Court Decision.

A Little Economic History 101:  E-commerce and State Sales Taxes

To understand the new Supreme Court ruling, let’s investigate a little of the history behind this ever-expanding e-commerce story.

Behold the Super Power of the E-commerce

No one really expected the economic curveball.  It was thrown by the astonishing expansion of Internet business.  “Accounting Today” witnesses the fact.  They stated, “In 1992, less than 2% of Americans had internet access.”  This figure compares “to about 89% today.”  Likewise, Justice Kennedy recently made this statement: “The Internet’s prevalence and power have changed the dynamics of the national economy…”

The Online Bargains Came with the Pain. Businesses and consumers were having profitable fun with the new shopping hobby.  However, state and local governments were losing tax revenue due to Internet sales.

A bit of quick research reveals that in 2017, e-commerce racked up $452 billion in sales.  And that was almost 9 percent of all retail sales.

The Ugly Truth of the Wide-Open Spaces of the Early Days of Online Sales

Some buyers deliberately sought big-ticket items online in order to avoid paying their state and local sales taxes.  Online sellers simply enjoyed the instant tax breaks.

How Did This Happen and What Was the Law?

You cannot blame the buyers or the sellers.  The economic landscape outstripped the laws at the federal, state and local levels.  Thus, it was, “In a federal report to Congress released last year, it was estimated that state and local governments were missing out on $8 to $13 billion in tax revenue.”  The reason was that “they could not collect sales tax from online retailers.”

A Quick Look at E-commerce Under the Quill Decision

  1. The Quill Decision was enacted in 1992 with a mind to policing the mail-order industry. This decision established the legality of how a state could require “an out of state retailer to collect and remit sales tax.”

In other words, local and state authorities could not demand tax of a retailer who did not have a building, office, or warehouse within its physical borders. That is correct. A seller had to have “property, people or some other physical connection within the state” in order for the state to tax the sales.

  1. Many States’ Response to Quill Meant Use Taxes:

Yes, “many states impose “use” taxes.  This tax requires “the in-state purchaser to pay tax on taxable items on which no sales tax was paid.”  However, consumers seldom have complied with these taxes.

The years marched by.  The health of the digital economy improved and expanded.  And states began to realize they were losing out on bigger and bigger revenues.  The “Quill” law, associated with physical presence, prevented the collection of tax revenues from online sales.

What’s in Your Nexus? A New Look at Physical Presence for 21st Century Ecommerce

  1. As revenues shrank, states began to challenge the status quo and insisted that be a “click-through” or virtual presence was just as powerful as a physical presence.  Therefore, these goods should be just as taxable.
  2. Moreover, Justice Kennedy, in Direct Marketing v. Brohll issued this statement.  “There is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”
  3. He pressured the court to revisit the “physical presence” standard.  He contended that “The Internet has caused far-reaching systematic and structural changes in the economy, and … it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”
  4. Likewise, Justice Neil Gorsuch condemned the old Quill stance.  He stated that “physical presence rule as an “analytical oddity” that “seems deliberately designed” to be overturned.

E-commerce Surprised the World with its Power and Popularity.

Now let’s fast-forward in time to the 2016 case that was decided recently, the landmark case and challenge to Quill that ignited this whole article:  South Dakota vs Wayfair.

To put it simply, the Supreme Court needed to examine the constitutionality of a South Dakota economic nexus law.

In order to defend herself from the massive revenue losses of e-commerce, South Dakota imposed a new law. It required “sales tax collection and remittance requirements on out-of-state sellers delivering more than $100,000 of goods or services into South Dakota.” …  And they added, “or engaging in 200 or more separate transactions for the delivery of goods or services into South Dakota.”  By the way, South Dakota was not watching their case all alone.  The state had shaped this law upon a model economic nexus law from the National Conference of State Legislatures.

How Bad Was It?

The South Dakota legislature utilized this law as an emergency declaration to “prevent erosion of the South Dakota tax base.  The case was not hysteria or politics.  You see, South Dakota does not have a state income tax.  So the only revenues available to run the state are sales and “use” taxes.  The case gained the power that affects all of us as online consumers, buyers, and sellers.

South Dakota was not dealing with tiny online sellers. The offending online retailers were Wayfair, Newegg, and Overstock.

Challenging the Big Three

The state enforced their law by filing a declaratory judgment action against all three.  Sheltered by the previously explained Quill law, the state and district courts always found in favor of the retailers in this and similar cases.

Thus, brave South Dakota went to the top.  And they appealed last week to the U.S. Supreme Court.

The New U.S. Supreme Court Decision

South Dakota won.  “The U.S. Supreme Court overturned the physical presence standard espoused in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Ill.”  However, celebrations are short-lived. The reason is that the individual states will have to adjust many of their local rulings involving taxation of Internet commerce.

According to the experts, major changes may occur in a few of the states.  These are states that have previously “taken the position that physical presence is necessary for the state to assert corporate income tax nexus against a corporation.”

State and Local Government Details and Clarifications

You should expect to see more work by accountants, lawyers, and lawmakers before the tax matters of Internet Business are clarified by the state and local government.

The federal wisdom of the new South Dakota vs. Wayfair landmark case is a beginning.  It partially proves an important point to us: If you are going to buy and sell on the Internet, you must learn the rules from an accountant that keeps up with the latest tax laws at every level.

There is one final twist in the case that you should know. “The South Dakota case only applied to online retailers with more than $100k in annual sales or 200 transactions in the state.”  What will happen in the case of very small e-commerce businesses is in some doubt.  It will depend a great deal on new laws enacted at the state and local level.

Some large online retailers are demanding legislative action from Congress.  They want the federal government to legislate a fair, equitable wide-reaching solution.  Look at all the little third-party sellers on Etsy and eBay.  Both eBay and Etsy want to protect their “microbusinesses” that sell on their platforms.

An Outcry from E-commerce Businesses, Large and Small

A number of retailers, from Amazon to Etsy to, may be impacted.  We don’t mean to imply that these corporations have been hiding from the taxes, but rather that they enable thousands of third-party sellers to hide in their shelter.  But that was in the days of Quill. 

Last year, Amazon “started collecting sales tax in all 45 states that require it.” And even Amazon may have a “substantial amount of work to do to help its Amazon Marketplace sellers stay compliant.”

However, the decision is new, and the ruling is very general.  In conclusion, we do not yet “know if that burden will fall primarily on Amazon or if it will be the responsibility of the sellers.”

More than 50 percent of all sales on the site are conducted via third-party sellers.  Some of these use Amazon for fulfillment.  But otherwise, they operate independent small- to medium-sized businesses.

Etsy and Complications

The Tax Squad at Gavrilov & Co sees the wisdom in a statement by Etsy CEO Josh Silverman.  He said, “While today’s decision is not the one for which we advocated, the Supreme Court did acknowledge the important difference between big Internet retailers and the creative entrepreneurs on our platform.”

Like any smart e-commerce retailer, Etsy is concerned about what it sees as “significant complexities in the thousands of state and local sales tax laws.”  They believe that the overruling of Quill means the Supreme Court has challenged Congress to create some laws for small business taxation.  “We believe there is now a call to action for Congress to create a simple, fair federal solution for micro-businesses,” Silverman added.

Obviously, this decision has roused some sleeping entrepreneurial giants.  And it shook some small e-commerce businesses.

We can only hope that if you are buying and selling online, you will utilize the protection of a scrupulous accountant who will keep you aware of taxation costs at every level.

Shopping has Changed and Will Never be Quite the Same

Keep this in mind as you make purchases for your Independence Day getaway or your Fourth of July celebrations.  Meanwhile, we at Gavrilov & Co will keep you appraised of any new developments in the rapidly-evolving world of e-commerce business, taxes and laws.

By Rudy Gavrilov

 Rudy Gavrilov is the Managing Partner of Gavrilov & Co LLP a certified public accounting firm located in NYC & Queens. Who believes that his clients deserve Better Numbers. Better Business. Better Life.