If you are an online merchant, you are likely aware of the Wayfair case, a 2018 ruling wherein the Supreme Court voted that states may charge sales tax for online purchases even if the seller has no physical presence in the state in question. However, since the ruling did not specify an explicit policy for back taxes, a new issue surrounding retroactive taxation has recently come to light. Despite states signing an amicus brief stating that tax would only be applied prospectively, California is now seeking back taxes for online sales dating as far back as 2012.
According to Accounting Today, this case is similar to recent cases involving Amazon in South Carolina and Walmart in Louisiana, where the states essentially decided to go back to pre-Wayfair territory to the 1992 Quill ruling, where the physical presence rule was used as a defining factor for taxation. Under this previous ruling, states wrote in a brief that back taxes would be prohibited, removing any retroactive tax liability for respondents.
A recent whitepaper issued by the Multistate Tax Commission that addresses marketplace facilitators does not broach the topic of these back taxes for online sellers. Similarly, it is likely that back taxes were not addressed in the Wayfair ruling because it was expected that states would still adhere to the original Quill brief and would not seek taxes for prior fiscal years. Unfortunately, as we have seen with Louisiana, South Carolina, and now California, that does not seem to be the case.
While there is an economic threshold for businesses to be liable for state tax collection, this development is troubling for anyone who sells online. The lack of advance notice and the violation of the principal of fundamental fairness puts even small business owners in danger, and it is expected that other states are watching the proceedings in California to decide whether to follow in her footsteps. If California sets a precedent by being successful in collecting back taxes in online sales, it is reasonable to assume that other states will also attempt to collect taxes retroactively.
While there has not yet been a case in the California, with the state electing to issue directives to remote sellers, both Louisiana and South Carolina have won lower-court decisions validating the back-taxes on remote sellers in their respective states.
As a small business owner who sells online, getting on the platform of a facilitator may be beneficial in protecting yourself against future retroactive tax collection. And be careful to make sure your bookkeeping is set up to track sales in each state so you can meet the compliance requirements.