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Is the issue of Internet taxation “nexus” heading to SCOTUS?

A court case pitting the state of South Dakota against online retailers Wayfair, NewEgg and Overstock is likely to head up to the nation’s highest court on appeal soon. The case, State of South Dakota v. Wayfair Inc., 28160-a-GAS, Supreme Court of South Dakota (Pierre), came down in favor of the Internet sellers who challenged a state law requiring any online retailer who collected more than $100,000 in annual to pay sales taxes on transactions.

The decision by the state’s highest court turned on a precedential 1992 SCOTUS decision, Quill v. North Dakota, which dealt specifically with the issue of creating a “nexus” for sales before taxes are collected. Specifically, that case says that a retailer must have a physical presence in a state before tax liability “kicks in.”

Shortcomings of the Quill case

Many have argued that the Quill decision is antiquated, since it doesn’t fully seem to appreciate the breadth and scope of online sales that have exploded since the advent of the Internet. After all, the “world wide web” as we know it was in its infancy back in 1992. Those outside of research labs or government institutions rarely used it until around 1993.

It is possible that SCOTUS will indeed accept this case, for no other reason than to give a modern-day examination of the complicated issues involved in taxing online sales.

Retail giant Amazon has created its own system of tax collection that many states are still contesting. Amazon now charges sales tax for purchases made through its own supply lines in states where sales tax is charged on similar acquisitions. The caveat to that is that the products must come from Amazon, and not from third-party sellers contracted with the company.

Does your business handle online sales transactions? If so, you might want to check the rules regarding the nexus of sales for taxation purposes. An experienced local tax attorney can advise you about whether sales tax is collectible for your transactions and what you will owe the IRS for income generated by online sales.

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