On January 12, 2018, the Supreme Court of the United States granted certiorari in the case of South Dakota v. Wayfair, Inc., which could likely determine the future of the physical presence requirement for sales tax collection, which was reaffirmed by the Court in their 1992 decision of Quill Corp. v. North Dakota. For over 25 years, the states have argued that requiring out-of-state sellers to have physical presence in their jurisdiction before sales tax collection obligations can be imposed, has cost them billions of dollars in tax revenue. This issue has reached a fever-pitch in recent years, as the exponential growth of the internet and online marketplaces such Amazon and eBay, have allowed businesses to sell to customers remotely, without having to collect tax on their sales.
In the Quill decision, the Court concluded that Congress has the “ultimate power to resolve” the issue of whether out-of-state or remote sellers should be compelled to collect sales or use taxes in states where they are making sales. Since then, Congress has made little to no progress in taking up or resolving an issue that has only been exacerbated by the growth of electronic commerce. This has left many states no option but to take matters into their own hands, passing new legislation or adopting administrative remedies to require the collection of tax on remote sales by out-of-state businesses. In the case before the Court, South Dakota passed legislation requiring sellers making $100,000 of annual sales or 200 separate transactions in their state to collect and remit South Dakota sales tax starting May 1, 2016.
This type of “economic nexus” threshold, which states have previously only applied to multistate businesses for income/franchise tax purposes is now being applied for sales and use tax purposes. To-date, economic nexus requirements have been imposed by Alabama (2015); Vermont, South Dakota, Tennessee (2016); Indiana, Maine, Mississippi, North Dakota, Rhode Island, Wyoming (2017) and Ohio and Washington starting Jan. 1, 2018. Even though economic nexus requirements are currently unconstitutional and are not enforceable given Quill’s physical presence standard, these states are positioning themselves to start imposing sales tax collection on remote sellers, should Quill be overturned by the Supreme Court or new Federal legislation be passed by Congress.
The Supreme Court’s decision in South Dakota v. Wayfair, Inc. could have far-reaching effects if the Court abrogates or overturns Quill. There is a strong likelihood that the Court will act on this on matter given overwhelming support by states and even members of the Court itself. In a 2015 decision, Justice Anthony Kennedy went as far stating that “the legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess,” essentially inviting the states to bring forth a challenge to physical presence. The Justice went as far as citing how changes in technology and consumer sophistication have created conditions that require a reconsideration of Quill, especially since the states are being harmed far greater than could have been anticipated in 1992.
Businesses that sell to customers across the United States should start evaluating their level of sales in each state, even if they do not currently have physical presence in a particular jurisdiction. If the Supreme Court rules in favor of South Dakota, you can expect states who have not already implemented economic nexus measures to take immediate action to require out-of-state sellers to collect tax. This will lead to increased collection and filing responsibilities and require changes in how the business currently addresses sales tax compliance. It is likely that the Court will hear arguments sometime in April and issue a decision in June before its summer recess.
If you have any questions about this or other SALT issues, please email Tom Mazurek at tmazurek@tsacpa.com. For additional State and Local Tax insights and resources, or to subscribe to our quarterly newsletter, visit tsacpa.com.
