On June 21, 2018, in a narrow 5 to 4 decision, the United States Supreme Court in South Dakota v. Wayfair, Inc. issued a decision which opens the door for states to require out-of-state merchants to collect and remit sales tax on internet sales. The issue of sales tax on internet sales is an issue of collection and remittance, not of liability. Under the laws of most states, including Indiana, if a seller does not collect sales tax from the purchaser, the purchaser is still legally obligated to pay the tax to their state of residence. In reality, purchasers rarely if ever do this.
The decision in Wayfair arose as a result of South Dakota enacting a statute requiring out of state sellers to collect and remit sales tax to South Dakota if the seller annually delivers more than $100,000 of goods or services into South Dakota or engages in 200 or more separate transactions for the delivery of goods and services in South Dakota.
The Supreme Court’s prior decision in Quill Corp. v. North Dakota provided that a seller could only be required to collect and remit sales tax if the seller had a physical presence in a particular state. In Wayfair, the Court stated that the effect of Quill was a “judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers – something that has become easier and more prevalent as technology has advanced.”
The Wayfair decision does not necessarily subject all internet sales to sales tax collection. The Court states that the seller must have a “substantial nexus” with the taxing state and that “complex state tax systems could have the effect of discriminating against interstate commerce.” The Court found that the requirement of a minimum of $100,000 in sales or 200 transactions annually, along with South Dakota adopting the Streamlined Sales and Use Tax Agreement, prevented discrimination against, or undue burdens on, interstate commerce.
The Streamlined Sales and Use Tax Agreement is an agreement between twenty-four states, the purpose of which is to simplify and modernize sales and use tax administration for states and sellers by utilizing a centralized electronic registration system, providing simplified tax returns and remittance procedures and adopting uniform rules.
Indiana, as a member of the Sales and Use Tax Agreement, has the same statute as South Dakota, requiring any out-of-state seller with annual sales of more than $100,000 or annual transactions of more than 200 to collect and remit sales tax. As a result, Indiana residents can expect to be charged sales tax on internet purchases going forward and retailers with physical locations in Indiana may find themselves at less of a competitive disadvantage.
About the Author
Mark S. Samila, a Co-Managing Partner at Kahn, Dees, Donovan & Kahn, LLP, in Evansville, Indiana, is a business attorney, Indiana Registered Civil Mediator and Licensed Certified Public Accountant (Missouri) whose practice includes tax and estate planning, financial services including bank and bond financing, creditors’ rights, workouts and bankruptcy and business law. Mark blends his accounting and financial background with his legal experience. In so doing, he provides legal analysis and also understands and considers the business and financial implications of a client’s legal options.