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Sales Tax For Online Services & Shopping

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On June 21st, the United States Supreme Court decided the case of South Dakota v. Wayfair, Inc. and its decision will have a large effect on ecommerce industries. The purpose of the case was to reconsider the current laws regarding the taxation of online businesses who provide interstate services and goods. Currently, many online retailers bypass taxation by limiting or removing their physical presence from states where they deliver goods or services. Typically, use or sales taxes are required by either the online merchants or their customers within that state. To understand the impact of the Supreme Court’s ruling in South Dakota v. Wayfair, it is necessary to understand the concerns and the legal precedents that were considered in this decision.

What sparked implementing sales tax on e-commerce and online services?

The two major concerns brought up in South Dakota v. Wayfair were the due process clause and the commerce​ clause. The due process is concerned with the administration of justice, guiding the Supreme Court’s determination of whether Wayfair’s business dealings within the State justified the payment of sales tax. The commerce clause gives Congress the power to regulate interstate commerce. However, one thing that must be noted about the commerce clause is that states cannot take actions that unnecessarily burdensome or impedes interstate commerce.

Legal Precedents

National Bellas Hess v. Department of Revenue (1967)

In 1967, the state of Illinois attempted to force Bellas Hess, a Missouri-based mail order house, to pay the use tax (related to sales tax) for its customers within the state of Illinois. Bellas Hess had no physical property within Illinois and did not utilize any type of advertising outlets (billboards, solicitors, etc.) within Illinois. Basically, the goods that customers ordered through the Bella Hess catalogue were shipped to a plant in Missouri and taken into Illinois by mail.

In the Supreme Court’s ruling, they decided that the U.S. Constitution’s Due Process and Commerce Clauses did not permit states to require sales tax from remote retailers who had no substantial amount of physical property or presence within that state.

Quill Corp. v. North Dakota (1992)

In 1992, the state of North Dakota notified Quill Corporation (another mail order company) that they were required to pay the use tax for the the purchases that North Dakota residents had made through Quill’s catalogue. Similar to the Bellas Hess case, the U.S. Supreme Court ruled that, because Quill had no physical presence in North Dakota, they were not required pay the sales tax required by North Dakota.

The Court’s Ruling in South Dakota v. Wayfair Inc. (2018)

Given the past decisions in the Bellas Hess and Quill cases, the law emphasized physical presence as the determining factor for taxation. Many online retailers have been sheltered from taxation in many states by limiting their physical presence within those states. This has created an economic discrimination against retailers that are physically located within those states. In the Wayfair ruling by the U.S. Supreme Court, the Court recited the purpose of the modern interpretation of the commerce clause is to bar states from practicing economic discrimination against interstate commerce. They also noted that internet commerce has allowed companies to reach customers without storefronts, often being “closer” or more accessible to customers through a website than a brick-and-mortar store. This means that “substantial physical presence” must also be redefined to include these mediums of a company’s tangible presence. The Court stated that it could not maintain a rule that disregarded the virtual sales aspect of most companies in today’s world. Chief Justice Roberts and Justices Breyer, Sotomayor, and Kagan dissented, arguing that Congress should determine the legal definition of physical presence. So, as a result of this reassessment of the physical presence rule maintained in the Bellas Hess and Quill cases, the judicial interpretation and definition of physical presence for online companies may be changing and affecting e-commerce in the near future.



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