The U.S. Supreme Court has ruled that states can require businesses with no physical presence in the state to collect sales tax. The 5-4 decision determined that “economic and virtual contacts” are enough to create a “substantial nexus” for allowing the state to require collection.“This decision is great news for our local businesses, especially those small businesses that are major employers in our cities and towns,” said Wayne George, executive director of the Municipal Association. “This change will help level the playing field for Main Street businesses by giving individual states the authority to streamline their sales tax laws and collect sales taxes directly from online retailers.This ruling recognizes the changing nature of commerce and the need to simplify the tax collection process.”
The Municipal Association has long supported Congressional attempts to give states the authority to require businesses to collect this sales tax. The Association’s board has twice adopted resolutions urging Congressional action to make this change.
By law, the consumer is supposed to pay the sales taxes owed on purchases bought from out-of-state online retailers on his income tax return as a use tax. However, there’s a good chance most consumers didn’t if they ordered from an out-of-state online retailer.
This puts South Carolina’s hometown brick and mortar businesses at a 5 to 10 percent competitive disadvantage to these out-of-state online retailers. Plus, millions of dollars in owed state and local sales taxes goes uncollected annually.
In November 2017, a Government Accountability Office report estimated that states and local governments could "gain from about $8 billion to about $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers."
According to report, if state and local governments had been allowed to require all remote sellers — companies located outside the state — to collect taxes on all remote sales last year, South Carolina could have seen between $132 million and $193 million in revenue.
This report also found that nearly half of those potential revenue gains to state and local governments would have resulted from collecting sales taxes on all e-marketplace sales, transactions on sites such as eBay, Etsy and Amazon Marketplace. The current dynamic also works against local brick-and-mortar businesses that lose out on sales when customers visit to try on or try out a product only to go home and purchase the item online state-tax free.
Read more about the specifics of the case and its history from the State and Local Legal Center.
UPDATE on June 22. Governing magazine article
UPDATE on June 24. National League of Cities' blog post that outlines more specifics about the decision.
For additional information, contact Reba Campbell at rcampbell@masc.sc or 803.933.1245.