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Local Taxes From Online Retailers

U.S. Supreme Court ruling sets the stage for sales taxes on retailers with no in-state presence

Online retailers have seized an enormous presence in the marketplace, and now they have a tax liability with local governments to match, following a major decision from the U.S. Supreme Court. Even so, several questions remain in how collecting the sales tax for each online sale will work.

The Supreme Court brought about this change on June 21, 2018, when it handed down its decision in South Dakota v. Wayfair, Inc. The decision on the matter came from a couple of cases, the most recent was the 1992 case Quill Corp. v. North Dakota. The decisions in those cases prohibited states from collecting sales tax from online retail sales in all cases where the retailer did not have a physical location inside the state.

Two and a half decades later, and after years of online retail commerce growing dramatically, the Wayfair ruling threw out the physical presence requirement, noting that it gave "some online retailers an arbitrary advantage over their competitors who collect state sales taxes."

The ruling is expected to increase total sales tax revenue collection by a potentially significant percentage. The U.S. Government Accountability Office estimated that in 2017, state and local governments in South Carolina could have received anywhere from $132 million to $193 million more in tax revenue had they been able to collect sales tax from remote sellers.

How South Carolina is impacted
After the ruling, the SC Department of Revenue issued an advisory opinion giving some clarity on how the sales tax process will now work. The opinion stipulates that remote sellers must collect sales taxes and remit them to SCDOR as long as they generate $100,000 in sales in South Carolina during the current or previous calendar year. These retailers must also get a South Carolina retail license. Every month, retailers must file a sales tax return with SCDOR, unless the total state and local sales tax due for that month amounts to less than $100.

Several unknowns remain. There is no existing mechanism for auditing retailers' reports. Also, retailers owe cities the local option sales taxes for online sales for which the purchase is delivered to addresses inside their city limits. However, difficulties may arise in accurately connecting the address for a specific sale to a municipality. The complexities of municipal boundaries can also complicate the question of whether a sale took place in a particular city. Other issues may result from discrepancies that exist among city boundary maps coming from different sources.

How do cities receive disbursements?
SCDOR began collecting sales tax from sellers without a physical presence on November 1, 2018. It now disburses the tax revenue as appropriate to the counties, which in turn provide any applicable local option sales tax amounts to the municipalities.