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Supreme Court Day of Reckoning for Free Online Sales?


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4/22/2018
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Supreme Court Day of Reckoning for Free Online Sales?

The Supreme Court heard arguments last Tuesday in South Dakota v. Wayfair, 494 U.S. 17 (2018) on whether to begin allowing states to impose sales & use tax on online sales and thereby overrule the long-standing physical presence test announced in Quill Corporation v. North Dakota, 504 U.S. 298 (1992)Since online retailers may not have a physical presence in any particular state, they frequently take the position that they are not subject to sales tax anywhere.  But, wait, don’t their goods land in nearly every state?  More on that in a minute.  Under current law, out-of-state vendors can ship product into a state like New York or New Jersey where they lack a physical plant or sales team, without collecting any sales & use tax, but they do so at their own peril. 

Every state is closing this massive loophole with a patchwork of exceptions that have begun to look like an attempt to plug holes in the Hoover damn with band-aids and duct tape.  Needless to say, a change in the law requiring reporting and paying tax on these transactions seems inevitable.

The drama has played out in high-profile showdowns like the challenge to the proposed Amazon Tax also known as the “Amazon” Click-Thru Sales Tax Nexus Law (Tax Law § § 1101 (b)(8)(vi)) in New York in the cases of Amazon.com, LLC vs. NYS Dep’t of Taxation & Finance, 81 A.D.3d 183 (2010) (Read Decision Here) (Read NY Supreme Court Appellate Decision Here) or Tax Court case of Amazon v. Comm’r of Internal Revenue, 184 T.C. No. 8 (Mar. 23, 2017)(Read Decision Here). 

The arguments before the Justices centered on the issue of whether it was the Supreme Court’s job to overturn its own outdated precedent (and thereby either engage in judicial rulemaking to fill the gaps or provoke Congress to act by virtue of repealing the precedent), or whether it was Congress’s job to listen to the competing interests of voters and craft legislation to address the issue directly. 

The refrain of those in favor of an online sales tax is that brick-and-mortar stores cannot compete with cheaper online retailers, who can charge lower prices because they don’t charge sales tax.  But, online retailers struggle to efficiently pay for logistics and for shipping & handling and build this into their pricing model.  Conversely, proponents of existing law and the relatively free online marketplace for goods argue from a policy standpoint that the lack of an online sales tax encourages increased online business, increases overall sales, and is good for the overall economy.  They note that the free online marketplace also democratizes the buying & selling process, opening it up to online digital marketers, affiliates, drop-ship operations, and other downmarket participants who lack sufficient capital on their own to invest in Property Plant & Equipment and a physical brick and mortar location—but, whose activities amplify and enhance the sales and purchases for those who do.

Congress has the power to potentially implement legislation to permit states to tax online sales.  Legislation aimed at doing just that has been introduced in the 114th Congress: the Marketplace Fairness Act of 2015 (S. 698) sponsored by Sen. Michael Enzi of Wyoming and the Remote Transactions Parity Act of 2015 (H.R. 2775) sponsored by Rep. Jason Chaffetz of Utah.

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If you have questions about the online sales tax Supreme Court battle or online sales tax planning or your treatment under the new Tax Cut & Jobs Act, give us a call at (201) 529-8024 or e-mail me at [email protected]



Category: Tax Law


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