Iowa now should be in the clear to collect taxes on internet sales and services after the U.S. Supreme Court ruled Thursday in favor of one of its neighbors.
In a 5-4 decision, the Supreme Court upheld a South Dakota law that required online companies to collect sales tax even if they didn’t have a physical presence in the state. Online retailers Wayfair Inc., Overstock.com and Newegg Inc. had challenged that law.
The “Wayfair (decision) is addressing just whether or not physical presence is required to be able to tax somebody and the Supreme Court is saying, ‘No, that’s not required,’” said Jon Landon, a tax lawyer with Shuttleworth and Ingersoll in Cedar Rapids.
The ruling comes less than a month after Iowa Gov. Kim Reynolds signed sweeping changes to the state’s tax rules into law. The new state law includes cuts to Iowa’s individual and corporate tax rates, but also would apply the states sales and use tax to purchases made online, subscription services such as Netflix and ride-hailing services such as Uber or Lyft.
The Iowa Department of Revenue said in a statement Thursday the Supreme Court decision, in addition with the new Iowa tax law, “creates a level playing field for online retailers and main street businesses in Iowa.”
A ruling against South Dakota could have hampered Iowa’s ability to collect those new sales taxes, said Bill Hanigan, a lawyer with Davis Brown Law Firm in Des Moines.
“If the Supreme Court had ruled against South Dakota, then we can forget trying to apply the new act,” Hanigan said.
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Landon also said Iowa’s new law should be OK, as parts of it mirror South Dakota’s law.
For example, Iowa’s new tax law would require any “marketplace seller” to collect sales tax for any Iowa purchase as long as that company makes more than $100,000 from sales in Iowa or has more than 200 Iowa sales in the year before.
South Dakota’s law had the same exemption, Reuters reported.
Iowa’s Department of Revenue still has to adopt rules to implement the new state law.
“It’s important to say that at some point this summer, apparently now, the Department of Revenue will have to start writing rules interpreting the new statute. As they do that, they’ll put more flesh on the bones and we’ll have a better understanding of what they intend to do,” Hanigan said.
It’s possible, Hanigan said, that the Department of Revenue would require online retailers to collect and provide sales tax payments to Iowa’s government. Or, he said, those companies could notify Iowa consumers they have to pay the tax, give a roster of every sale made to an Iowan to the Revenue Department and put the onus on consumers to pay the tax.
The new sales tax law does not go into effect until Jan. 1, 2019.
“These provisions will only be applied from Jan. 1, 2019, onward. The Iowa Department of Revenue will not seek to impose tax liability prior to Jan. 1, 2019, for online retailers whose only obligation to collect Iowa sales tax comes from these new laws,” the department said in its statement.
The department has estimated Iowa would collect about $67 million more in tax revenue — $27.6 million of which would come from online retailers — from the sales tax changes in the 2019 fiscal year, which begins July 1.
By fiscal year 2024, the department estimated that amount would grow to about $178 million.
In a November 2017 report, the federal Government Accountability Office estimated Iowa could collect between $104 million and $146 million if it had more authority to collect taxes on online sales.
While it will mean increased revenues for state government, costs would increase for Iowa consumers who use the taxed services.
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The Supreme Court ruling also could make things more difficult for Iowa companies who sell products online. Barring Congressional action, companies may face different rules from each state that collects sales tax, Landon and Hanigan said.
“The retailers now are all on notice. The challenge for the retailers is going to be, especially for mid-sized retailers, like our local businesses, is if they do online sales now they’ve got to comply everywhere. That’s not an easy task,” Landon said.
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