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Amazon has become the latest big corporation to draw hostile fire from the White House about not paying its fair share of taxes. This time it was a little different, though. Unlike the countless previous examples of large corporations being reprimanded for complex accounting practices using offshore tax havens, profit shifting, or inversion deals, this one focused on state-level sales and use taxes. And that should have any company that sells things over the Internet very concerned.
The root of the issue is current U.S. tax law governing the treatment of out-of-state transactions. Under current law, remote sellers are only required to collect sales taxes on purchases if they have a physical presence in the state where the goods are bought.
This law pre-dates the Internet. In fact, the original precedent was set in a 1967 Supreme Court decision in National Bellas Hess vs. Illinois, which involved an old-timey catalog company that sold June Cleaver-style dresses. That precedent was later upheld in a 1992 Supreme Court decision in Quill vs. North Dakota. However, the 1992 decision contained a clause that gave Congress the right to overturn the decision.
They’ve been debating it ever since. Most recently, a proposal to introduce a national internet sales tax was included in the $1.3 trillion omnibus spending bill, but it was removed in the eleventh hour. This week, the Supreme Court will take on the topic one more time in a new case, South Dakota vs. Wayfair. The case involves a law South Dakota passed in 2006, which requires online retailer to collect sales taxes if the business has more than $100,000 in annual sales to South Dakota residents or more than 200 separate transactions with state residents.
Any business that sells anything over the Internet will want to watch this one closely. If the Court upholds the South Dakota law, it will set the stage for other states around the country to start implementing more aggressive remote sales requirements. To some degree, this is already happening. As I wrote back in 2016, a loosely-coordinated coalition of 13 state governments teamed up to start getting imposing tough local taxes on internet-based sales. Today, a massively complicated web of various state, county, and city taxes and various different compliance requirements exist in local tax jurisdictions around the country.
A Supreme Court decision in favor of South Dakota could result in an exponential expansion in the level of complexity internet retailers will need to deal with.
If the decision goes the other way, pressure will be cranked up on Congress to do something about it. To-date, Congress has already introduced several different proposals, all with varying degrees of complexity and real-world viability that – if passed – would have created significant new tax compliance challenges for ecommerce companies.
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