Changes to technology, business, and modern life in general happen at a rapid and constant pace in the 21st Century. The law, on the other hand, often plays catch-up to these developments, with statutes or legal precedents which once made sense becoming unworkable or obsolete.
The rise, power, and magnitude of the internet and online commerce over the past quarter-century has been a frequent battlefield for this mismatch between the law and reality. Unfortunately for small business owners who sell goods online, the Supreme Court recently ruled that the reality is that internet sellers should be subject to state sales taxes just as their brick-and-mortar cousins are.
Physical Presence Not Required in a Virtual World
In its 5-4 decision in South Dakota v. Wayfair, Inc., the Court abandoned decades of its prior decisions in which it held that a seller’s “physical presence” was required in a state before it could be subject to sales tax there.
South Dakota had enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.” In upholding South Dakota’s law, the Court explicitly acknowledged that reality had passed the “physical presence” rule by, noting that their predecessors who established the rule:
“did not have before [them] the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes… The argument, moreover, that the physical presence rule is clear and easy to apply is unsound, as attempts to apply the physical presence rule to online retail sales have proved unworkable.”
What It Means for Online Sellers
As “unworkable” as the physical presence rule was for online retail sales, the imposition of potentially dozens of different state sales taxes on small internet sellers could become equally troublesome.
Small businesses will have to register in every state they ship goods to, will have to file corporate or gross receipt tax returns in multiple jurisdictions, and will have to upgrade their accounting and back-office systems to ensure compliance and keep up with the administrative burdens of collecting and paying sales taxes from sea to shining sea. It’s no surprise that the stock of Avalara, Inc. a newly public company which provides cloud-based tax compliance software for small businesses, rose 14% after the Court’s ruling.
For Illinois small businesses which derive revenue from online sales in other states, understanding each state’s tax rates, requirements, and exemptions – which may be different for different categories of goods or sales – can be a tricky enterprise. If you have any questions or need help with your company’s sales tax obligations in light of the Supreme Court’s ruling, please contact us. We welcome the opportunity to assist you.