Sales Tax for Out-of-State Retailers?

The Commerce Clause of the U.S. Constitution has governed interstate commerce since the United States was founded. But the rapid rise of internet-based businesses has thrown lawmakers for a loop when it comes to their ability to assess state income taxes on interstate sales. An impending U.S. Supreme Court decision could potentially permit states to require e-commerce retailers to collect state sales taxes. Read on to learn more about the potential impact of the South Dakota v. Wayfair Inc. decision.

What Issues Will South Dakota v. Wayfair Decide?

In Quill, a case that has been on the books since 1992—long before the internet became a commercial behemoth—the U.S. Supreme Court announced that the Commerce Clause restricts states from requiring out-of-state retailers that don't have a physical storefront within the state from collecting sales taxes from that state’s residents. When Quill was decided, these out-of-state businesses were generally companies that sold products via catalog orders and “snail mail,” far different from the Amazons of today’s world.

Some states, including South Dakota, argue that Quill is outdated and should be overturned given the tremendous reach of e-commerce businesses and the impact on in-state businesses. Because internet businesses can sell products without charging sales tax to residents of certain states, they’re often able to offer more competitive prices than brick-and-mortar businesses.

And while taxpayers are required to compute the amount of state sales tax owed on out-of-state purchases and remit these taxes when they file their income tax returns, it’s believed that few accurately track or report this information due to the lack of state enforcement. For states like South Dakota, which has no income tax, this loss of sales tax revenue has hit coffers hard.  

What Effect May E-Commerce Businesses See?

Businesses are concerned that a ruling in South Dakota’s favor could impose retroactive liability for state sales taxes, potentially leading to a huge (and expensive) mess if these businesses are required to go back and calculate the sales tax owed for each transaction over the last decade or more. And because some of the country’s largest internet-based businesses have distribution centers and offices in most, if not all, states—and are required to collect sales taxes for sales within these states—these businesses argue that the issue in Wayfair is quickly becoming moot.

But regardless of how the Supreme Court decides this case, taxpayers may soon find it difficult to purchase products from out-of-state businesses without paying sales taxes—either at the time of the transaction or when they file their state tax return.