In a widely anticipated decision, the US Supreme Court has struck down a longstanding rule preventing states from imposing their sales taxes on sellers who do not have a physical presence in that state.
Today’s decision in the case South Dakota v. Wayfair, Inc. represents a stark turnaround from longstanding federal policy precluding state enforcement of sales taxes on sellers without a “nexus” (typically a physical presence such as a retail location) within that state. The decision, long sought by state and local governments, could promote far broader application of sales taxes, and remove a lingering tax inequity between local and remote sales.
Maryland does not authorize broad-based local sales taxes (like many other states do), so the local effects for county governments are likely to be far lesser than elsewhere. However, the potential effects on the state fiscal posture are significant. As the state grapples with a forecasted structural deficit, and anticipates substantial new education spending commitments, a broadened application of sales tax collection responsibilities by non-Maryland retailers could play a role in state fiscal planning.
Like in many states, Maryland’s sales tax is technically written as a “Sales and Use Tax,” meaning it obliges tax payment not only on taxable purchases within the state, but also on taxable items purchased elsewhere but brought into Maryland for use. The enforcement of those provisions, especially upon individuals, is understandably troublesome. Some Marylanders may receive notification from the Office of the Comptroller indicating a tax obligation after purchasing out-of-state furniture, for example, independent of whether the retailer collected sales tax. Taxpayers are able, and indeed obligated, to directly remit the “use tax” on such purchases. But implementation on smaller cross-border sales is administratively impossible. Efficient sales tax administration inherently relies on the seller’s willingness to calculate, collect, and remit the taxes due.
A more complex matter arises with online retailers, whose physical presence may be very limited geographically to one site, but who solicit and conduct business in Maryland and other states with similar tax laws. For decades, under previous court holdings, states could not impose any collection/remittance obligation onto such retailers, unless there was a physical tie to the collecting state. In today’s Wayfair ruling, the courts overturned that principle, and seemingly opened the doors for states, through legislation and/or administration, to seek broader application and collection of existing taxes.
In a joint statement, numerous local government organizations comments on the ruling:
State and local organizations applaud the U.S. Supreme Court’s decision recognizing that the 1992 Quill ruling put Main Street retailers at a competitive disadvantage to remote sellers and the efforts by states to simplify the sales tax collection process and giving those states remote sales tax collection authority. For 26 years Congress has failed to act and through the efforts of Justice Anthony Kennedy, the federal government has finally recognized the changing nature of commerce and state efforts to simplify the collection process.
For more background on the Wayfair case: