Last Thursday, the U.S. Supreme Court issued its decision in the landmark South Dakota v. Wayfair Inc. case, which will drastically change the law for Kansas and Missouri e-commerce companies and out-of-state sellers operating in the Kansas City area.
In the 5-4 decision, the court held that the existing law was incorrectly applied in the 1992 Quill v. North Dakota case to assist companies that are based online, clarifying that even if an out-of-state seller has no employees, inventory or offices in a state, that state can still subject that company to the state’s sales tax requirements.
Before the ruling, businesses that did not have a physical presence in Missouri or Kansas were not required to collect and remit sales taxes. Additionally, businesses in either state that did not have a physical presence in other states were not required to collect and remit sales tax in other states.
The Wayfair decision, which overturned Quill, dates back to early 2016, when South Dakota successfully passed legislation requiring out-of-state retailers that deliver more than $100,000 of goods or services into the state or engage in more than 200 individual transactions there to collect and remit sales tax.
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Justice Anthony Kennedy wrote the majority opinion, joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Chief Justice John Roberts, Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor authored the dissenting opinion, emphasizing that Congress, not the Supreme Court, should address the rule.
This will have a widespread impact on all online businesses, as companies could have increased burdens to correctly calculate, collect and pay sales taxes on their sales. As the dissent pointed out, more than 10,000 jurisdictions impose sales taxes, each with different tax rates, different rules for governing tax-exempt services, different product category definitions and different standards for determining whether an out-of-state company has a substantial presence in the jurisdiction.
A few examples of the differing standards:
▪ New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters.
▪ Texas taxes sales of plain deodorant at 6.25 percent, but imposes no tax on deodorant with antiperspirant.
▪ Illinois categorizes Twix as food but Snickers as candy, because Twix has flour and Snickers does not.
The Supreme Court also stated that the existing law, as applied today, is outdated because it was originally created to “serve as a tax shelter for businesses that decide to limit their physical presence but still sell goods and services to consumers” — a practice that has become easier and more prevalent as technology has advanced. The court noted that when the 1992 Quill opinion was rendered, mail order sales totaled $180 billion. But in 2017, e-commerce and other remote sales exceeded half a trillion dollars.
It is possible that Congress will act now that Wayfair has been decided in favor of the states. There have been previous legislative proposals to simplify the sales tax calculations on remote sales, but so far nothing has passed.
It’s now up to both Kansas and Missouri legislatures to determine how Wayfair is applied and what the thresholds will be. Kansas City retailers with an online presence can expect increased burdens to correctly calculate, collect and remit sales taxes. Now that online retailers outside Kansas City must also collect sales tax, businesses with a physical location in the area could see a more even playing field.
D. Scott Lindstrom is an attorney specializing in tax issues at the Polsinelli law firm. He co-authored this with William J. Sanders, chairman of Polsinelli’s tax practice group.