Supreme Court Overrules Supreme Court

You can tell when a court isn't itself totally clear about what to do. We have one conservative voting with three liberals, and one liberal joining with three conservative justices. The justice in the middle of those ideological leanings, Anthony Kennedy, once again was the deciding vote.

What am I referring to? The case in question is South Dakota v. Wayfair, a case about whether sales tax has to be collected by out-of-state entities. The case overturned is Quill Corporation v. North Dakota. (What is it about the Dakotas and out-of-state sales tax?)

You've probably been reading lots of opinions and articles about the Wayfair ruling today. Much of what is being written is not being written accurately. Moreover, most of the arguments that people are using in Internet fora and most of the descriptions about why things like Amazon stock took a plunge are just dead wrong. 

It's a bit important that you know what's going on here and what the problems are. That's because a majority of camera gear is bought online now. Many people thought they were saving money when they bought online and avoided sales tax. They weren't. Most were breaking a law. That's because of something called use tax, which all states with sales tax have in place for when you don't pay sales tax to an out-of-state sales source. 

Let's back up.

45 US states have sales tax (some variation exists on things that are exempt from sales tax, such as food, drugs, or clothing; and some states have one day each year where sales tax isn't charged). Whether you like sales tax or not, it exists through much of America, and it's one of the few methods by which state and local governments can get direct funding from their constituents. If you get something from out-of-state and don't pay sales tax on it, you are legally obligated to pay a use tax on it, which you generally report on your income tax return.

So far, so good. 

You may remember a time when mail order thrived. You'd get catalogs in the mail and you could phone or mail in orders that would be delivered directly to you. The initiation of free rural mail delivery through the US in 1896 played a role in that happening, as it allowed people in small towns to buy things they couldn't get locally. Sears, Roebuck, and Company was one of the first big practitioners of mail order, though over the years many other companies got into the mail order business. 

Eventually, states figured out that people buying mail order from out-of-state businesses weren't paying sales tax on their purchases. So we got lawsuits. The first of which that gave the modern definition that the term "nexus" had in conjunction with mail order was, I think, National Bellas Hess, Inc. v Department of Revenue of Illinois, which the Supreme Court decided back in 1967.  It was followed in 1992 by Quill Corporation v. North Dakota. Those two cases are the ones that are usually cited in sales tax discussions, though there are others.

Basically, up until this week, the premise was that a business had to have a physical presence ("nexus") in a state for a state to require that business to collect sales taxes. 

What the Wayfair decision has done is overturn Quill. But you're probably hearing about this in coverage that doesn't understand nuance. The reason why the court decided as it did in Wayfair is that South Dakota wrote particular language into their sales tax legislation that they claimed—and the Supreme Court has upheld—avoids the problems of burdensome reporting and established a meaningful de minimus (minimum) threshold. South Dakota has many local sales taxes as well as state, but they claim these are minimized to outside entities. 

It's the de minimus threshold that probably swayed the court, though. What I mean by that is that only businesses with at least 200 transactions or US$100,000 in sales to South Dakota residents need collect the sales tax and report it.

For large online sales companies, this isn't a big deal. The implication is that those companies will do enough business that they'll now have to generate 45 sales tax payments and reports to the states (though I should point out that the timing of such reports varies from state to state, and we still have to get to the part about local sales tax and variations on what is actually taxed). 

For small companies like mine, the new standard is totally burdensome, however. There are a handful of states that I do 200 transactions in a year. What they are, I don't know as I write this, as I'll have to go back and do a lot of accounting sleuthing to figure that out. And I'll also bet that it has varied every year. There are no states in which I do US$100,000 of online sales (duh). 

What I argued for—and what Congress has had in draft form for a couple of decades now but has never had a vote on the floor that I know of—is a centralized collection point. Because online commerce is mostly interstate, it really is the Federal government that needs to be in charge of online sales that cross borders. 

The proposal for the Federal government to collect the appropriate state sales taxes and distribute it properly has been drafted many times, but still not law. It's the only solution that would address the nexus issue, the de minimus issue, the burdensome reporting issues, and the whole notion of laws that apply to someone that can't vote for or against them. Indeed, it was the Supreme Court in Quill that suggested the centralized Federal approach ("not only [an issue] that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."). Note that states and locales would still be able to select their tax rates and what those apply to under a correctly Federalized approach.

What's going to happen now, though, is that 44 other states are going to adopt some variation of the South Dakota law language and insist online businesses to pay and report sales tax directly to them, regardless of where the business is located. I'll make you a wager that some try to finesse and change the South Dakota language, so we'll get more confusion, not less. 

To put it succinctly, we currently have at least 10,814 sales tax jurisdictions in the US (state, local, and city). Texas alone has 1594. While people tell me there is software to do all the work of figuring out the proper tax and reporting it, I'll also point out that all those that have tried to do that came up with conflicting reports. Neither postal code nor street address seems to be able to convincingly point to the right answer for any given delivery. Worse, what is taxed varies across tax jurisdictions (keep reading). This comprises burdensome reporting, and it places out-of-state entities at risk of penalty that they have no real way to challenge (they have no legal presence in the state, thus no representation they can complain to). 

Within a few months, companies like this site's exclusive advertiser, B&H, will likely be collecting sales tax nationwide. Get ready for it. It will happen. If you're one of those that think that use tax is a rule that you can and should break, you have very little time left to break that rule ;~). 

Which is where we start to get into all the wrong information being bandied about on the Internet. For example: "this new ruling will hurt Amazon." Nope. Amazon is already collecting sales tax on orders they serve across the country. It probably will hurt very small companies that are using Amazon as their ecommerce engine (e.g. the ones that say "fulfilled by Amazon"). The ones that say "Ships from and sold by Amazon.com"? You're already paying state sales tax on those (you might not be paying local taxes, but note what I wrote about 10,814 taxing jurisdictions that computer programs don't agree on yet and which generate a reporting burden; that still needs to be fixed, and there are several states where Amazon is not yet doing that). 

You'll also see statements that the Wayfair ruling will help local brick and mortar stores. I've seen not a single shred of evidence to even imply that this will be true. Amazon started collecting sales tax, yet they increased sales. That's just one example that suggests the contrary: it seems that convenience and selection and delivery guarantees play a large part in growing online sales and contracting brick and mortar sales. The "sales tax avoidance" idea may be a justification to many, but as I noted, that's not a legal justification. (I've long been paying use tax on my out-of-state purchases, because, well, it's the law.)

Finally, you'll see it written that small online business entities will be hurt by this ruling. That's completely unknown at this point. In theory, the 200 orders threshold ought to apply to local tax collection, too, otherwise the ruling would absolutely hurt a lot of smaller businesses. But it might not, who knows? That's because the Supreme Court really punted on a lot of the issues being argued. The ruling seems to basically say "yeah, the South Dakota language doesn't seem too burdensome." But then it goes on to say that the previous cases are overruled. The problem? those cases held the only established standards. The court did not really address the de minimus and reporting burden issues other than what I just noted: doesn't seem too burdensome. 

Indeed, the court wrote "The potential for such issues to arise in some later case cannot justify retaining [Quill and Bellas Hess]." Gee, you five guys and gals in the robes, you even admit that you're going to end up hearing more cases as states deviate from the South Dakota language and small businesses begin to be able to prove burden. Way to make things clearer.

Justice Roberts got it right in his dissent: "The Court, for example, breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers." He cites examples of exceptions to tax rules that vary by jurisdictions, including New Jersey's baffling "sales tax applies to yarn for art projects, but not sweaters" law. Plenty such examples exist, and remember, they can exist in over 10,000 different pieces of legislation now. I should also note that there are plenty of so-called brick and mortar stores that sell to out of state customers. I buy most of my Nikon gear from Jack's Camera in Indiana, for instance. Jack's is now going to find themselves caught up in Wayfair fall-out, too. 

Three bills that address the issues still sit in Congress waiting for a party with a spine to get them to a vote. Most notably the Marketplace Fairness Act, which has been pending since 2011. I support that legislation—even though it isn't perfect—and so should you. It's a better solution than the mess we're about to have.

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