June 28, 2018 9:50 pm

Supreme Court Greenlights Sales Tax on Internet Transactions

The U.S. Supreme Court has reversed a position it has held for more than 25 years and likely it will hit your pocketbook. Here’s what the case is about and how it may affect you.

In 1992, the Court said that a state could not require out-of-state sellers to collect sales tax on transactions with its residents (Quill v. North Dakota). The reason: The seller had no physical presence within the state so it had no jurisdiction over the seller. Back then, such transactions usually entailed catalog sales.

Now, in the age of the Internet and online sales, the Court has reversed its position. It upheld South Dakota’s sales tax law (South Dakota v. Wayfair, Inc.). South Dakota law requires online sellers to collect and remit to the state a sales tax of 4.5% on transactions with South Dakota residents. The law exempts small sellers, defined as those with annual sales of $100,000 or less, or fewer than 200 separate transactions. The reason for the reversal: in the e-commerce era, a physical presence is no longer necessary as long as there is some substantial nexus (connection) with a state. The $100,000 revenue/200 transaction threshold was deemed to be substantial enough.

To date, some large companies, such as Amazon, have voluntarily opted to collect sales taxes on its sales. Following this case, other states eager for revenue likely will enact sales tax laws similar to that in South Dakota. In fact, four states already passed such laws set to go into effect on July 1, 2018: Connecticut, Hawaii, Kentucky, and North Dakota. Whether these laws will be modified in light of the court’s definition of substantial nexus, and whether other states will pass laws identical to the South Dakota law approved by the Supreme Court remains to be seen. The takeaway is that you as a consumer will probably be paying sales taxes on your online purchases in much the same way as you do on sales from your local retailers. The only difference: states may require only state sales tax and not any additional local sales tax.

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Tax Glossary

Modified adjusted gross income (MAGI)

This is generally adjusted gross income increased by certain items such as tax-free foreign earned income. MAGI usually is used to determine phaseouts of certain deductions and credits.

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