Sales taxes have always been major revenue sources to the states, including Florida which has a state-wide 6% sales tax. However, for years, consumers have turned to the Internet to make purchases in part to be able to avoid this because most Internet sales transactions were not subject to any state or local sales tax. This changed on June 21, 2018 when the United States Supreme Court issued a 5-4 decision in South Dakota v. Wayfair overturning earlier decisions and paving the way for states to collect sales taxes from online retailers for sales of goods to in-state residents.
Previously, a state could not require an out-of-state or online retailer to collect sales taxes from its customers if that retailer did not have an actual, physical presence within the state. Over the last 20 years or so, Internet commerce and retailing has become a major part of the U.S. economy. Since online retailers without a physical presence in a state were not required to collect sales taxes, this led to trillions of dollars in online sales transactions going basically tax free. This had a direct impact on states’ sales tax revenue.
Impact of Wayfair Decision
In Wayfair, the Supreme Court recognized how the Internet has changed the economy and how consumers shop and also the realities that these changes have wrought to many states’ budget shortfalls. Now, under Wayfair, an online retailer does not need to have any actual physical presence within a state in order to be required to collect sales taxes. It will be up to the individual state to determine whether it wants the online retailer to collect sales tax or not.
On one hand, consumers stand to lose a bit under Wayfair because now Internet purchases can be subject to sales taxes at the point of checkout. In Florida such purchases have been subject to tax all along, since the state technically requires the consumer to report and pay a “use tax” on any items where sales tax was not paid at the time of purchase. However, this regulation has not been vigorously enforced rendering Floridian’s Internet purchases essentially tax free. Going forward, if Florida requires online retailers to collect the sales taxes, those taxes will be added directly to the purchase price in the online shopping cart and paid by the consumer at checkout. This makes goods more expensive to the consumer.
On the other hand, many view this as a benefit to small business because small, local businesses with physical locations often lost sales to online retailers from consumers seeking to avoid sales tax. Post Wayfair, if the online retailer is required to collect sales tax at checkout, the playing field becomes a bit more level by making online purchases potentially little less attractive and bringing consumers back to local businesses, where at least they may not have to pay shipping costs as well.
Similarly, under Wayfair, states stand to benefit because they will be able to capture a tax revenue stream more efficiently than leaving it up to the consumer to voluntarily report and pay via use tax. This new revenue can help significantly to narrow budget gaps in some states.
Regardless how one looks at the costs or benefits of Wayfair, the decision does significantly alter the current sales tax environment. While it may be some time yet before we see how Florida—or any other state—will react and how it will implement any new sales tax scheme, the landscape is certainly going to change. Henderson, Franklin will continue to monitor how things may change and our attorneys are available to discuss how these changes might impact your business.