Posted by Trent Accounting

The Growing Online Market And It’s Tax Implications Explained

The Growing Online Market And It’s Tax Implications Explained

The online marketplace has been the new mode of easy selling and marketing of products, by just posting the item online with item description and prices.  Then the buyers will purchase it through credit cards or other types of electronic payments and have them shipped to the buyer’s location.  Through the years, the online marketplace has changed the way business is being done. Shoppers do not need to drive and visit some stores or shops to buy their favorite items; it can be just one click away from their phones and gadgets. There has been a misconception in this type of business; most people think that by just using the internet they get away from taxes imposed by the state or government.

In 2012 United States Supreme Court rendered a decision in the case of Quill Corporation v. North Dakota, which prohibits states from requiring a business to collect sales tax unless the business had a physical presence in the state. This decision was guided by the principles that taxes must be fair and nondiscriminatory, that there must be a substantial nexus with the jurisdiction and a relationship between the tax and any state-provided services. Simply, the court said those merchants were required to collect sales tax only when they had a physical presence in the state where the customer resides, such as a store, office or warehouse. This decision established that there has been an unfair disadvantage; it caused the state to lose annual tax revenues up to $33 billion.

However, in June 2018, it was fundamentally overruled in the South Dakota v. Wayfair Inc. case decision. The Court stated that individual states can require online sellers and all e-commerce sites to collect state sales tax on their sales, regardless of whether they have a physical presence in the state. Majority of the justices believed that the emergence of the internet as a mainstream medium for interstate commerce caused the physical presence rule to become further removed from economic reality and resulted in significant revenue losses to the States. This rule also admits exceptions to small merchants, those who have annual sales income of below 100,000 or with fewer than 200 customers in the state annually. This judicial ruling created a clamor to small business ventures for it established significant complexities among local and state tax authorities. The Congress needs to enact a law to cater concerns for simple and fair impositions of sales taxes.   In the meantime, everyone is left scratching their heads and looking at an increasingly gridlocked Congress for answers.

In applying the rule, a customer who order tax-free items online but living in states that charge a sales tax, technically required to report that purchase to their state tax agency and pay the sales tax directly to the agency. When consumers are required to do so, it is called a "use" tax. In use tax, it is the consumer that is giving the money directly to the state government. While sales tax, it is the retailer is the one handing over the money. In collecting use taxes on small purchased items costs more than just simply letting the consumer not pay the tax. So, state tax agencies divert their focus on collecting use taxes for big-ticket items that are purchased online with no sales tax, such as cars and boats. Everyone must be aware that there are a number of states that have stepped up to enforce their use tax laws and trying to make their state residents pay the taxes that should be paid.

In Wisconsin, their residents have already been paying sales taxes on Amazon because of their distribution center in Kenosha, some big changes are coming in the tax collections for online selling that’s because of the recent Supreme Court decision. For years now, Amazon in countries where it operates has been collecting sales taxes or value-added tax from all its customers uniformly throughout the country. In October, all Wisconsin’s remote sellers are required to register to collect and remit sales or use tax. Their Department of Revenue forecasted to collect as much as $187 million of additional sales tax revenue after implementation.  

The world is changing and online selling is growing at four times the rate of retail stores in the country. The court decision is timely in order to have balance and fair collection and distribution of taxes. Technological advances making our laws obsolete and updates are necessary to cater to the rapidly growing and increasing need of every citizen. It may be burdensome, but that’s what the law says.

Trent Accounting