Earlier this week, the South Dakota Supreme Court issued a decision that is likely to end up before the U.S. Supreme Court. The issue before the high court would be whether a state can impose a sales or use tax on purchases by state residents from out-of-state merchants with no physical presence in the state.
U.S. Supreme Court cases have said that it would be an unconstitutional violation of the Commerce Clause for a state government to impose sales or use taxes on sales transactions of an out-of-state seller with no physical presence in the state like an office, store or outlet.
In a 2015 case, Supreme Court Justice Anthony Kennedy questioned whether this rule was still wise considering the technological advances today, noting that the shift of sales from brick-and-mortar stores to the Internet platform has caused a drop in sales tax revenues needed by state treasuries. Justice Kennedy urged consideration of “an appropriate case for the Court to reexamine Quill and Bellas Hess.” (Quill Corp. v. North Dakota and Nat’l Bellas Hess, Inc., v. Dep’t of Rev. of the St. of Ill. were the cases establishing the current rule.)
The South Dakota legislature almost immediately passed a law designed to test these rules in court. The law required certain merchants with no physical presence in South Dakota, but who either sold goods there providing them $100,000 in annual gross revenue or with at least 200 separate South Dakota transactions annually.
The law also gives detailed authority to the state of South Dakota to challenge the law in court, which it did, resulting in a September 13 South Dakota Supreme Court case called South Dakota v. Wayfair Inc. that affirmed a lower court ruling that the law violates the U.S. Constitution pursuant to U.S. Supreme Court precedent.
According to Courthouse News Service, South Dakota Attorney General Marty Jackley is already preparing a petition for certiorari that would ask the U.S. Supreme Court to take the case and overturn previous precedential cases in order to allow states to tax out-of-state merchants for sales even if they have no physical presence in the state.
The Texas Comptroller website describes Texas law regarding Internet sales:
- Sellers “engaged in business” in Texas are required to collect sales taxes on goods and services “sold and delivered to Texas locations.” To be engaged in business, a seller must have a “Texas outlet, office or location where they take orders for taxable items.”
- Transportation charges for sales to Texas locations are also taxable as “connected to the sale.”
- If property is bought from an out-of-state merchant on which sales tax was not due, the buyer or “user” owes use tax instead. Sometimes this is collected by the merchant as part of the transaction, otherwise it is supposed to be reported and paid by the buyer. (If the buyer paid sales or use tax to another state on the purchase, that tax can be credited against any Texas use tax due.)
- Texas sales tax is currently 6.25 percent, plus potential local taxes of up to 2 percent. Texas use tax rates are the same.
Here at Brown Tax, we represent and advise businesses in Texas and all over the country in with their issues concerning state sales and use taxes. We will watch this case with interest as it has the potential to greatly affect the bottom line and legal obligations of our clients, should the high court reverse its previous position. This would allow states to step up taxation on out-of-state merchants even without physical presence in the states at issue.