Origin, Destination, and the Internet
The question is: when we buy online, where does that transaction take place? The answer is almost philosophical, but it’s the basis of much of the confusion about internet taxes and nexus. In 1992, the Supreme Court reversed a North Dakota state court ruling on sales taxes in a case that became the basis for all e-commerce sales tax decisions. The case focused on Quill, an office supply company that did a lot of business in North Dakota — but had no employees or buildings in the state. North Dakota had changed their law requiring “retailer maintaining a place of business in” North Dakota to collect sales tax to a law requiring “every person who engages in regular or systematic solicitation of a consumer market in th[e] state” to collect sales tax. They defined “regular or systematic solicitation” to include every company with three or more ads a year appearing in North Dakota, and that certainly included Quill. Does running an ad establish nexus? The first court to examine the question said no.
Nexus or no nexus?
Since the state had not shown that any state revenue was used to benefit Quill, they said, Quill couldn’t be responsible for taxes. When a company has a building in a state, it benefits from the roads and utilities and other public services. With no building, the state can’t claim nexus. The North Dakota State Supreme court disagreed, on grounds that were new then but sound familiar to us now. Mail order, they said, had become such an important part of business that it should no longer be left out of ordinary requirements for buying and selling. Furthermore, the state of North Dakota had created the economic climate that made the state a good sales venue for Quill, and it dealt with the paper waste produced by all those mail order catalogs. The Supreme Court overturned the state ruling. States cannot, it said, make interstate commerce more difficult than it has to be, according to the U.S. Constitution. Looking at North Dakota’s waste disposal investment in Quill, the court said that Quill and similar companies made investments in the mail order business on the expectation that they would not have to collect sales taxes, so the burden of doing so would not have been included in their calculations.
When a person in North Dakota filled out that form, the Supreme Court figured, they hadn’t yet made a purchase. The form was carried through the mail to Quill in Illinois, and that’s where the sale took place. Enter e-commerce. Fast forward to 2018, and the Supreme Court looked at the question again. South Dakota was the state involved in the new case, Wayfair vs. South Dakota. South Dakota thought that the South Dakota customer buying something online was making that transaction on their computer, in their home or office right there in South Dakota. Surely that would be a transaction taking place in South Dakota.
A loss for the state
South Dakota looked on this revenue as money lost to them. If their residents bought goods in town instead of online, they’d get the funds. Now they don’t. It’s that simple. Those in favor of collecting sales tax for e-commerce also argued that online sellers effectively get to undercut local sellers on prices, and that this is unfair.
Does the sale still take place in the seller’s jurisdiction? If a shopper sends an order through the ether to a shop, does the sale take place before the seller sees that order and fills it? Probably not. If the internet dropped the connection before the order reached the seller, the order would not be made.
Nonetheless, the Supreme Court decided that South Dakota was right. They overturned Quill. States can now make laws requiring remote sellers to collect and remit sales tax on items they sell to customers in the state, no matter where the seller is.
If you make remote sales, whether you’re a manufacturer, a contractor, a miner, a direct seller, or a retailer, you now have to pay attention not just to physical nexus but also to economic nexus. If you gain revenue from a state, you will be responsible for sales tax compliance in that state.
Call 479-715-4275 to learn how Sales Tax DataLINK can help you navigate the new requirements.
The GAO speaks up on remote seller sales taxes The Government Accountability Office is responsible for providing important facts to Congress so they can make the best legislative decisions. They have just released a report on the question of sales tax...
Three tax types In order to have the revenue needed to provide basic services and support the government, legislatures at every level have to impose taxes. Basically, there are three kinds of taxes in the United States: income tax property tax sales tax...
Sales tax calculations and filing can be done by hand. When you make a sale, you figure out whether the goods and services are taxable and whether you have nexus in the buyer's tax jurisdiction. More on that later. Once you've determined that you need...