image: Amazon

image: Amazon

Every now and then the Supreme Court takes cases that stand to directly impact the fashion industry and those within its periphery. South Dakota v. Wayfair, Inc. is one of those cases. After making its way through the lower courts, the South Dakota v. Wayfair, Inc. case has found itself before the United States’ highest court. As arguments between the two parties are slated to take place, let’s take a look at how the case stands to affect fashion, the retail industry at large, and e-commerce consumers, alike.

In plain English, the South Dakota v. Wayfair, Inc. case came about in response to a 1990’s court ruling (Quill v. North Dakota) that a state could only require a business with a physical presence in a specific state to collect sales taxes on a purchase. In that same vein, businesses without that physical presence – such as Quill, a mail order company with offices and warehouses in Illinois, California, and Georgia – could not be required to collect taxes on sales in any state but Illinois, California, and Georgia.  

Now, 26 years later, the game has changed. With the rise of e-commerce giants, such as Amazon (which only recently began collecting taxes), the Supreme Court’s holding that retailers are not required to collect sales taxes unless they have a physical presence in a state is up for debate.

As noted by the Tax Foundation, “Traditional brick-and-mortar retailers that have to collect sales taxes feel they are at a competitive disadvantage [compared to e-commerce businesses].” As for the states, they are said to be losing billions of dollars as a result of the “physical location” rule.

South Dakota, tired of watching hundreds of millions of dollars whoosh before its eyes, is one of many states has enacted a law that requires out-of-state sellers to collect taxes and pay them to South Dakota. In particular, state law requires that e-commerce businesses making at least 200 sales – or more than $100,000 from sales – of taxable goods or services in South Dakota to collect and remit a sales tax of 4.5 percent.

Enter: Wayfair, which collects sales tax in all but five of the 50 states (even though it is not legally obligated to do so in Delaware, Montana, Oregon, and New Hampshire, which do not have state-level sales tax requirements). The Boston-based home goods e-commerce business filed suit against the state of South Dakota to challenge the state tax law, and the case has made its way up to the Supreme Court, which is hearing arguments between the parties on the case on Tuesday.

The (Potential) Impact

So, what does any of this mean for you, brand owners and consumers? Well, it depends. Assuming that the court sides with South Dakota, the ruling could serve to add backing to other states’ sales tax laws aimed at imposing tax obligations on online retailers (assuming they satisfy the “substantial nexus prong” of the dormant Commerce Clause test). A court decision in favor of Wayfair would lead to even more questions.

What we do know is this: By agreeing to hear the Wayfair case (the Supreme Court is not required to hear all of the cases that cross its desk taking), the Court has verified that, at a  minimum, a change to the decades-old “physical presence standard” is worthy of discussion in the Amazon age.

And as rather aptly noted by CPA Practice Advisor, “No matter how the Supreme Court decides the case, online retailers will still have to worry about future sales tax collection requirements. The only real questions are how soon they will need to be able to collect appropriate sales taxes on online sales and the best way to do so.” 

* The case is South Dakota v. Wayfair, Inc., 17-494 (SCOTUS).