Supreme Court overturns Quill’s physical presence requirement for sales tax collection
On June 21, 2018, the Supreme Court rendered its decision in the South Dakota v. Wayfair Inc. et al case and every state that collects sales taxes stood up and applauded. This decision makes it much easier for states to assert sales tax nexus on out of state sellers of goods and require them to collect sales taxes on their behalf. The Court held that states can assert nexus for sales and use tax purposes without requiring a seller’s physical presence in the state.
Previous Supreme Court decisions in Quill Corp v. North Dakota (1992) and National Bellas Hess Inc., v. Department of Revenue of Illinois, set the standard that sellers had to have a physical presence for the state to require the seller collect sales tax on the transaction. Merely shipping goods into the state was not sufficient. Both cases were decided well before the explosion of the internet economy which removes or dramatically reduces the need for physical presence in any one state.
For years, the states have complained that the changing nature of the way things are bought and sold, was costing them millions in sales tax revenues. There have also been complaints from brick and mortar stores that having to collect sales taxes was putting them at a competitive disadvantage when selling their products in the marketplace. Over the years, the Supreme Court declined to take on other cases that were like the Wayfair case, feeling that the issue was best left to Congress and a legislative solution. It’s been 26 years since the Quill decision and Congress hasn’t been motivated to get involved. Thus, we have been left with Quill and National Bellas Hess Inc. cases as precedent for guidance in this area. Until South Dakota v. Wayfair et al, that is…
South Dakota, like many states imposes a sales tax on the sales of goods in state. For South Dakota, this is a substantial source of tax revenue. It was losing much of this sales tax revenue on sales made to South Dakota residents by out of state sellers that weren’t required to collect sales taxes. Keep in mind that states that have sales taxes generally already have corresponding use taxes as well. Use taxes require that the consumer to pay any sales tax that wasn’t collected by the seller.
To counteract the loss of revenue (or cynically, to engage out of state sellers as its tax collection service), South Dakota passed a law that required out of state sellers that delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for goods or services to collect and remit sales taxes to South Dakota. This was in direct conflict with the “physical presence” requirement of Quill and National Bellas Hess Inc cases.
The new 2016 South Dakota law requires large internet resellers like Wayfair (and Overstock.com and Newegg Inc. that were also part of the lawsuit filed by South Dakota) to register and collect South Dakota sales taxes. The companies argued that the law was unconstitutional, and the South Dakota courts agreed. This elevated the case to the Supreme Court which agreed to hear the case.
In its decision on South Dakota v. Wayfair Inc et al, the Court recognized the changes in the way goods are bought and sold and found that the physical presence requirement on its previous decisions wasn’t a correct interpretation of the Commerce Clause. In many cases the tax resulting using Quill as the measuring stick didn’t make any sense. It is also interesting to note that the South Dakota law prohibits retroactive application of its new law.
In the past it was relatively easy for out of state retailers to avoid collecting that states sales taxes. If the company had no physical presence and the goods were shipped common carrier, the company was off the hook. Going forward, that may not be the case.
We expect that over the next year, states will look to expand their nexus definitions for sales tax purposes consistent with the South Dakota law. While it is unclear how this all will shake out, we can expect greater sales tax compliance for our clients that make out of state retail sales.
We will continue to monitor continuing developments in this area and provide you with further guidance as the states react to this decision. If you have any further questions, please contact your Maillie LLP representative.