The Supreme Court of the United States (SCOTUS) recently released a holding that has shook the business world. In the past, businesses were subject to state sales tax when they had a physical connection to the state. A headquarters or brick and mortar store within the state are examples that met this requirement. This is no longer the case.
SCOTUS changed the rules with South Dakota v. Wayfair, Inc. In this case, SCOTUS stated states can impose a sales tax on certain out-of-state retailers.
This holding is a divergence from previous law, which required businesses have a physical presence in the state in order to require the tax. The shift has left many businesses wondering how the ruling will impact their operations.
Although the full impact is not yet known, there are a few things that seem likely:
- Physical presence is not required. This is the big one. A business does not need to have a physical presence in a state to have a tax obligation within that state.
- Realistic parameters required. Additional legal challenges will likely arise as states attempt to put together reasonable taxation laws for these situations. It is very likely courts will require states use realistic parameters when applying a tax. South Dakota provided an example in the Wayfair case. South Dakota’s tax applied to businesses that did more than $100,000 in business or over 200 transactions within the state. The parameters are very clear and were deemed reasonable by SCOTUS.
- States may attempt retroactive taxes. A recent piece in Accounting Today points out that although South Dakota did not apply the tax retroactively, other states will likely try. Such an attempt will likely result in legal challenges.
This ruling will likely result in a need for businesses that partake in the online marketplace to review their business strategy. In some cases, they may be subject to additional tax obligations.