By Amy Drumm, MRA Vice President, Government Affairs
After 26 years and 37 states passing Main Street Fairness laws, the U.S. Supreme Court ruled 5-4 in June to allow states to require online, out-of-state sellers to collect sales tax the same as local stores. The retail victory in Wayfair v. South Dakota is a huge win for retailers. It puts all retailers on a level playing field and brings e-commerce into the 21st century.
THE CASE ITSELF AND SOUTH DAKOTA LAW
In its decision, the Supreme Court upheld a South Dakota law that requires out-of-state sellers to collect South Dakota’s sales tax. The court said that the physical presence test (a requirement that a business collect taxes if it has a substantial physical presence in the state) is not necessary and a virtual or economic presence is enough. The court also found that previous court cases created, rather than resolved, market distortions.
South Dakota’s law passed the Commerce Clause test by;
• setting a sales threshold,
• not going after retroactive taxes,
• providing access to sales tax software paid for by the state,
• providing immunity for sellers using the state’s provided sales tax, and
• having adopted Streamlined Sales and Use Tax Agreement (SSUTA) uniform rules.
MICHIGAN’S NEXT STEPS
The Michigan Department of Treasury has announced it will begin enforcing sales tax collection from remote sellers who meet the same threshold as South Dakota’s law (more than $100,000 in annual sales in Michigan or more than 200 annual transactions with Michigan consumers) on Oct. 1. Even better, the change will happen administratively and does not require us to pass a new law.
This administrative change is possible because of steps MRA successfully advocated for in the past. Michigan, like South Dakota, is one of the 23 states that have adopted the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA standardizes taxes to reduce administrative and compliance costs. It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures and other uniform rules. The legislature also passed a bill in 2014 that expanded what types of activities gave a business physical presence (“affiliate/click-through nexus”).
CONGRESSIONAL NEXT STEPS
While Congress is not required to act, it will likely want to weigh in by outlining the terms under which states can collect taxes. Unlike Michigan, 38 of the 45 states with a sales tax also have county and local sales taxes. In fact, the U.S. House Judiciary Committee held a hearing on July 24 to hear a variety of viewpoints on the potential impact of the court’s decision.
If Congress acts, they should and likely will address the following issues: simplifying tax rates and which items are taxable, limiting audit liability, addressing a standardized remittance schedule, requiring states provide free software to sellers, and determining where the sale occurs. Congress has also been sympathetic to smaller businesses asking for a certain dollar threshold exemption in the past and may bring that up in its discussions.