The Supreme Court of the United States (SCOTUS) has taken into consideration the application of a state sales tax for online transactions in South Dakota v. Wayfair.

SCOTUS has answered this question in the past. In 1992, the court addressed a similar issue in Quill Corp. V. North Dakota. In Quill, SCOTUS decided a business must have a substantial physical presence in a state for a state tax to apply. An online transaction alone did not suffice.

What has changed? The retail marketplace has changed since the early nineties. Fourteen percent of all retail sales in 2017 occurred in the online marketplace. This translates to over $450 billion in goods purchased on the internet. Many of these online transactions are completed without a state sales tax.

South Dakota passed a law in 2016 that allowed it to tax out-of-state sellers. This law was challenged by the large online retailer Wayfair, resulting in the case before the court.

In this case, South Dakota argues the lack of a state sales tax for online transactions has resulted in the loss of revenue used for education, health care and infrastructure while also hurting local, small businesses. Critics counter that many small businesses use larger online platforms, like Amazon, to sell their goods. Thus, the online sales tax would result in a greater tax burden for small businesses.

Is there a way to help small businesses while still collecting a sales tax? A recent piece in The Hill provides an interesting answer. It discusses collecting a sales tax on foreign retailers that are using online platforms.

 

Retailers based in China are responsible for over 30 percent of the top 10,000 sellers on eBay. The authors behind the piece, both professors of technology and operations at the University of Michigan’s Ross School of Business, explain that although the distinction sounds complicated it would be relatively easy to implement. Many of these online platforms, like eBay, already have the infrastructure to implement a tax on foreign sellers based on the shipping origins of the products. Although not a final answer, it provides a potential way to benefit small, local businesses while still allowing states to collect a sales tax on some online transactions.

How can businesses prepare? The case discussion provides an example of the evolving nature of tax law and the role it plays in business planning. As such, businesses are wise to review their tax plan on a regular basis. An attorney experienced in the interplay of taxes and business ownership can help.