U.S. Supreme Court Reverses Decisions on Taxation of Online Sales

Minnesota local governments with sales taxes should see positive financial impacts as a result of the decision.
(Published Jul 2, 2018)

The U.S. Supreme Court handed down a major decision in South Dakota v. Wayfair on June 21, concluding that state and local governments can require remote retailers with no physical presence in a state to collect and remit sales taxes on purchases made by residents and businesses of that state.

The decision reverses two previous decisions and will have a positive financial impact on states with sales and use taxes, including Minnesota, as well as Minnesota local units of government with local sales taxes. States and local governments that levy sales taxes have seen an erosion in the growth of sales tax collections as electronic commerce has rapidly expanded. Prior to the Wayfair decision, retailers that did not have a physical presence in a state could not be compelled to collect sales taxes from purchasers in that state.

In deciding the case, Justice Anthony Kennedy wrote the majority opinion and was joined by justices Ginsberg and Alito as well as Gorsuch and Thomas, who both filed concurring opinions. Kennedy’s opinion suggested that the “physical presence” standard for retailers was both unsound and incorrect and that Wayfair, an e-commerce seller of home goods, maintained an extensive “virtual presence.” He also suggested that the physical presence standard resulted in a “judicially created tax shelter” for some businesses.

Justice Roberts wrote the dissenting opinion and was joined by justices Breyer, Sotomayor, and Kagan. The dissent essentially suggests that the Court was wrong in reaching its conclusions under two earlier decisions, National Bellas Hess v. Illinois (1967) and Quill v. North Dakota (1992) but that Congress, not the Supreme Court, should act on the matter. The physical presence standard was initially established in National Bellas Hess and reaffirmed in the Quill decisions.

State preparations

Minnesota is well situated for the decision. Minnesota has been a participating member of the multi-state Streamlined Sales and Use Tax Project (SSUTP) and is one of 24 states that have enacted changes to our sales tax system to comply with the SSUTP standards. The SSUTP effort was initiated in direct response to the earlier U.S. Supreme Court decisions that cited “undue burden” on interstate commerce as the basis for preventing states from enforcing collection responsibility on retailers without a physical presence in a state.

In addition, in 2017 the Legislature enacted changes in Minnesota’s sales tax statutes that extended the duty to collect and remit sales tax to a much broader array of online retailers, remote sellers, and marketplace providers making retail sales to Minnesota individuals and businesses. The 2017 changes were scheduled to be effective July 1, 2019 or earlier if the Supreme Court or Congress allows for collection of sales tax on remote sellers.

Impact on Minnesota cities

Keep in mind that most city local option sales taxes are structured to fund a specific capital project and any increase in local sales tax collections will likely only complete the funding of that project earlier than expected, after which the current local sales tax would automatically sunset.

According to initial estimates prepared by the Government Accounting Office, the decision will likely result in a roughly $132 million to $206 million increase in annual state and local revenues under the expanded tax collection responsibility to non-Minnesota retailers. That range of estimates suggests sales tax collections will increase by roughly 2.5 percent to 3.5 percent over current collections, which cities can use as a ballpark estimate of the local impact.

Technically, much of the projected increase in collections has been previously due but not paid as use tax by consumers. The state’s use tax is considered a complement to the sales tax when sales tax is not collected, however the consumer, as opposed to the retailer, is responsible for remitting the use tax. Now more use tax obligations will be collected as sales tax instead by sellers.

The Minnesota Department of Revenue is in the process of analyzing the Wayfair decision as well as the 2017 changes enacted by the Legislature in order to develop advice for online retailers, remote sellers, and marketplace providers. The department is directing retailers to the Streamlined Sales Tax Registration System that will allow a retailer to collect, report, and pay sales taxes to all 24 of the SSUTA-member states. At this point, it appears that the earliest the collection responsibility will be imposed on retailers will be Oct. 1, 2018.

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