Reported, Remote Sales Taxes Likely to Increase
With a recent landmark decision, the U.S. Supreme Court changed a fundamental concept in the administration of state and local sales taxes, and Washington local governments should see an increase in reported, remote sales taxes.
In the case known as South Dakota v. Wayfair (Wayfair), the Court upheld a recent South Dakota law and specifically said that retail businesses no longer had to have a physical presence in a state to be potentially liable to collect that state’s sales taxes. In this blog post, I will examine the reasons the Court changed this standard and its implications on local governments in Washington State.
Prior to the Wayfair decision, a state and/or local government was limited in its ability to require retail businesses to collect sales tax — with that requirement applying only to those businesses located within that jurisdiction. This prior standard, known as “physical presence”, also came from the U.S. Supreme Court in Quill Corp. v. North Dakota (1992). In that case, the court affirmed a previous ruling (Bellas Hess, Inc. v. Department of Revenue of Illinois, 1967) that the myriad of different sales tax laws across the country would impose too great a burden on interstate commerce if these were allowed to be imposed on businesses outside of the jurisdiction. In the Quill case, an 8-1 majority of the court upheld the physical presence standard for imposing a state’s sales taxes, noting that Congress had the authority to resolve such conflicts using the Interstate Commerce Clause (e.g., the Commerce Clause) of the U.S. Constitution.
The rampant growth of Internet-based remote sales led many states to begin working together in 1999 to simplify multiple, state-based sales tax laws. The result was the creation of the Streamlined Sales Tax Project. Over nearly the past 20 years, representatives from state and local governments, businesses, and others have worked together to both simplify and standardize sales tax administration. These efforts were focused on making it easier for out-of-state and multistate businesses to comply with sales tax laws. After making significant progress (and several unsuccessful attempts to change these standards in Congress), South Dakota determined that it was time to ask the U.S. Supreme Court to revisit the standard they previously set in their decision in the Quill case.
South Dakota v. Wayfair: The Results
Essentially South Dakota was successful. The Court, in its June 21, 2018 decision (decided in a 5-4 vote) in Wayfair said:
“the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions in Quill… should be, and are now, overruled.”
While the court clearly reversed the physical presence standard, it remanded the case back for further consideration on other matters “not inconsistent with this decision.” This leaves it clear that the physical presence standard is gone but the Court did not specifically detail other aspects of what constitutes legal collection of sales taxes from sellers who reside outside of a jurisdiction’s boundaries.
There are many other nuances to this history and the ongoing effort to “streamline” sales tax collection on remote sales. We won’t go into them here, but more information on the subject can be found on the Streamlined Sales Tax website FAQs.
Impacts to Washington State
Here in Washington State, the Department of Revenue has been an active participant in these efforts from very early on. Washington is one of the 24 states that have conformed their sales tax laws to the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA provides for a common set of basic requirements among the participants that simplifies sales tax administration and clarifies the taxability of retail goods or services through an online matrix. This matrix is then used by businesses (or their sales tax compliance services) to clarify the taxability of products. Washington conformed its laws to the SSUTA and became a full member of the Streamlined Sales Tax Project in 2008. South Dakota is also a member of the SSUTA and the Supreme Court made specific mention of these standardizations in its decision in Wayfair.
With the Wayfair decision clearing the way for states to begin requiring out-of-state businesses to collect their sales taxes, Washington State is now planning to enforce laws, similar to South Dakota’s, which Washington adopted in 2017. Effective October 1, 2018, remote sellers and marketplace facilitators that have $100,000 of gross retail sales or 200 retail transactions in the state during the current or prior calendar year are required to collect and remit sales tax on all taxable retail sales in Washington, according to RCW 82.08.020 and 82.08.050.
As a result, both the State of Washington and its local governments should see an increase in sales tax collections. Some increases due to collections on remote sales began to occur when Washington State joined the SSUTA in 2008. That is because businesses also joined the SSUTA and began collecting and remitting sales tax on their remote sales voluntarily. There are about 4,000 businesses nationwide that have already been registered with SSTUTA and have remitted sales taxes on remote sales. Washington State is assuming that it will take other businesses time to become aware of and comply with the new standards.
What Does the Future Hold?
The amount of new sales tax on remote sales that local governments will see in future revenues is difficult to predict. However, Washington State has developed just such a prediction on a statewide basis. These predictions are difficult to make for several reasons, such as knowing how many remote retailers are already collecting and remitting tax, what taxable items are being shipped into Washington communities, and how long will it take retailers to understand and comply with the new legal framework. On the first point, it is likely that many remote retail sales are already being taxed on business-to-business activity due to payment of use taxes by the purchasers.
New taxes from compliance with the new guidance from the Washington Department of Revenue will likely begin around the first of next year.
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