The Supreme Court of the United States (SCOTUS) has agreed to take on the issue of sales tax for online transactions. SCOTUS will decide whether or not a business is required to collect a state’s sales tax when the business has no physical connection to the state.
When does a sales tax normally apply? Generally, the law requires a sales tax apply in the state the business has a physical presence. Under current law, if a business has a headquarters or brick and mortar store in a state, the state sales tax generally applies.
Based on this logic, online transactions generally do not qualify unless the business also has a physical presence within that state. Instances where the only interaction the business has with the state is the fact that the consumer who purchased the product resides within the state do not currently have to pay that state’s sales tax.
Why is this an issue? States argue that they are losing substantial funds by the societal shift to reliance on online shopping. The state’s coffers once relied on funds from sales taxes, and these funds are dwindling.
Would this be an easy change? Critics argue the sales tax issue is much more complex than many realize.
A recent report in CBS News provides a good example. The example uses the sales tax for Illinois and its application to candy. Snickers is taxed at a higher rate than Twix. Why? Because the state tax is higher for candy. Food that contains flour, like the cookie portion of the Twix bar, is not considered candy. Thus Twix gets a lower tax rate.
Navigating intricacies like these is very costly. Unfortunately, this is not the only cost businesses will need to account for if the change becomes reality. An additional cost: the threat of expensive audits.
How could the change result in an increase in audits? If SCOTUS rules in favor of the change, it is likely the government will conduct audits to ensure that businesses are following these new rules.
As such, businesses that face an audit are wise to take steps to protect their interests. This includes seeking legal counsel to help handle the audit on your behalf.