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Sales, use taxes often are subjects of confusion

July 8, 2018 GMT

The U.S. Supreme Court’s recent decision in South Dakota v. Wayfair has exposed a fissure in our understanding concerning the difference between “sales” tax and “use” tax. The difference between the two levied taxes has to do with who bears the burden of paying the 6 percent tax on purchases made through online retailers with no physical presence in West Virginia.

Currently, if a consumer purchases a retail good through an online seller with no physical presence in West Virginia and that retailer does not collect the 6 percent state sales tax imposed on such purchases, then the consumer is liable for remitting that amount to the tax commissioner.

A tax collected and remitted by the purchaser is called a “use” tax because the good is being taxed at the point of consumption or its “use.” On the other hand, when the retailer collects the tax at the point of sale, it is a “sales” tax. The only difference between a sales tax and a use tax is whose responsible for collecting and remitting the taxable amount from the purchase. The retail sale is taxable whether or not it was made in person or online.

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West Virginia Code §11-15A-2 (d) reads, ”[u]se tax is hereby imposed upon every person using tangible personal property, custom software, or taxable service within this state. That person’s liability is not extinguished until the tax has been paid. A receipt with the tax separately stated thereon issued by a retailer engaged in business in this state, or by a foreign retailer who is authorized by the Tax Commissioner to collect the tax imposed by this article, relieves the purchaser from further liability for the tax to which the receipt refers.”

Before the Court’s ruling in South Dakota v. Wayfair, the only way to tax purchases from online retailers with no physical presence in a state was to levy the tax at the point of consumption (i.e., make the consumer responsible for the collection and remittance). This was due to a 1992 United States Supreme Court case styled Quill Corporation v. North Dakota which concluded that the Constitution’s “Dormant” Commerce Clause prohibited the states from requiring businesses to collect and remit sales tax unless the retailer had a substantial connection to the state (namely a physical location).

The Quill decision, in essence, gave out-of-state online retailers a price advantage over local brick-and-mortar stores. Out-of-state retailers were under no obligation to collect the tax at the point of sale, so the burden shifted to the consumer to collect and remit the sales taxes. The consumer who, by and large, did not know that they are liable for the tax, therefore, did not pay it.

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The Court’s ruling, in South Dakota v. Wayfair, opens the door for states to increase their sales tax collection and enforcement efforts, by permitting them to require that online retailers, with no physical presence in the state, collect and remit state sales tax, rather than relying on the consumer to do so, if the retailers’ economic activity within the state meets a certain nexus requirement.

The law at issue in South Dakota v. Wayfair applied to out-of-state online retailers with more than $100,000 in annual sales from South Dakota or more than 200 separate transactions for the delivery of goods or services to South Dakota. In this way, it exempts small and midsize retailers and merchants (such as the individual selling a few items on eBay), but it captures larger retailers that have received a price advantage by advertising and selling in the state, without establishing a physical presence there.

If West Virginia were to pass a law comparable to the one passed by South Dakota, it would not increase taxes; it would increase the collection of a tax already owed. What is now a use tax would become a sales tax for certain retailers whose annual sales in West Virginia total over $100,000 or who generates 200 or more separate transactions for delivery to West Virginia.

Those trying to classify the law at the center of South Dakota v. Wayfair as a tax increase misunderstand the difference between a sales tax and a use tax.

Perhaps one solution is to require out-of-state retailers with annual sales in West Virginia totaling over $100,000 or who generate 200 or more separate transactions with no physical presence in the state to collect and remit sales tax while also reducing the rates from 6 percent to 3 or 4 percent for all retail sales. Thus, broaden the base and increase collections while lowering the sales tax rates across the board.

Nigel E. Jeffries is an attorney in Charleston.