On June 21, 2018 the U.S. Supreme Court issued the widely anticipated decision in South Dakota v. Wayfair, et al. No. 17-494, which is the most significant decision on state taxation in the last 50 years.
On January 12, 2018 and then on April 17, 2018, the U.S. Supreme Court first agreed to hear the case and then considered oral arguments in South Dakota v. Wayfair, a case challenging South Dakota’s anti-Quill sales tax nexus law. In Quill (1992), the U.S. Supreme Court held that, for Commerce Clause nexus purposes, out of state retailers must have a physical presence in a state or locality before it may impose a duty on a remote vendor to collect tax. In 2016, South Dakota became the first state to enact legislation that directly challenged Quill’s bright line physical presence requirement. Under this law, South Dakota required remote merchants with no physical presence in the state to collect and remit South Dakota’s sales tax, upon meeting certain threshold requirements. Under this law, tax collection is imposed if either of the following criteria was met:
- The remote seller’s annual gross revenue of sales of tangible property, any products transferred electronically, or services delivered into South Dakota exceed $100,000; or
- The remote seller has 200 or more separate transactions of tangible property, any products transferred electronically, or services delivered into South Dakota per year.
On June 21, 2018, the U.S. Supreme Court in a 5-4 decision held that the physical presence requirement for state tax jurisdiction is incorrect and not a requirement under the Commerce Clause. In summary, the Court ruled that the “physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.” Further, the majority ruled that the South Dakota’s statutory requirements satisfied the substantial nexus requirement and remanded to the South Dakota Supreme Court for further proceedings.
Impact of the Decision
E-commerce merchants can expect a significant increase in their sales and use tax reporting responsibilities. States will likely impose similar dollar and transaction thresholds for nexus as South Dakota. Furthermore, the recordkeeping necessary to comply with potentially 10,000-plus taxing authorities would be excessive, at best. In addition, without any restrictions or guidelines by the Court, unresolved issues include the following:
- Will there be a federal legislative response?
- Will this be applied retroactively?
- Is one transaction in the state enough to create nexus?
- What about foreign entities selling into the states, formerly protected by the physical presence requirement?
Merchants will first need to determine if their goods and services are subject to tax in each jurisdiction. Then they must determine if each customer's transaction is exempt from the tax due to a resale or other exemption circumstance. If tax needs to be paid, the merchant will need to register with the state to become a taxpayer, then determine the correct rate of tax to charge. As consultants, we can assist with each of these issues including outsourcing this new compliance. Contact us today!