The History of Sales Tax and Where It Stands Today
September 6, 2019
South Dakota v. Wayfair was a 2018 United States Supreme Court case in which the court held by a 5-4 majority that states may charge tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state.
With all that’s going on with sales tax today you may be wondering about when it started. You might be surprised to learn that sales tax isn’t even 100 years old. It’s tough to pinpoint what state actually started sales tax but around the time of the Great Depression is when some states saw the idea of sales tax and jumped in on it. At least 11 states had adopted a sales tax by 1933. By 1940, 18 more states had jumped on board. As of 2019, only five states haven’t adopted sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Sales Tax was running smoothly for a number of years, until the internet arrived. The tax began shifting from in person, in store, to online. This resulted in states seeing a significant dip in sales tax revenues because many internet sellers such as Amazon are physically located outside of most states. Since the internet sellers did not maintain a significant presence of personnel or property, including inventory and office space, they did not have to collect sales tax on sales into the state. The consumers eventually caught on and noticed that sales tax was not due on these internet purchases, and most failed to realize they were technically required to pay use tax on these internet purchases.
Fast forward to today. On June 21, 2018, the Supreme Court handed down its ruling on South Dakota v Wayfair, requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state”. This specific ruling overturns prior rulings and potentially exposes remote sellers to numerous sale tax filing requirements across the country.
Following South Dakota’s win in Wayfair, many states are now enacting economic nexus (a specific level of sales within a state) sales tax regimes, with different sales thresholds and effective dates. Over the years, economic nexus has been the primary trend. Most states have some form of economic nexus rule in place, recently passed, or scheduled to take effect in the future. Since South Dakota announced its intention to take more online retailers to court, at least 20 states have passed legislation enacting economic nexus rules with similar thresholds to South Dakota.
What is happening now is not just states, but counties, municipalities, and other tax jurisdictions are requiring retailers to register to collect sales tax. There will also be new thresholds coming into play, which will make this already complicated issue more complicated. To ensure registration, these taxing jurisdictions are getting information from whatever source they can find–information sharing agreements with other taxing jurisdictions or third-party services.
We want to help you navigate the waves of sales and use tax and its evolving laws and regulations. If you need help we’d love to talk with you to start making a plan on how to become compliant.