Supreme Court Tax Ruling Will Impact Online Retailers

On June 21, 2018, the U.S. Supreme Court released its ruling on the much-anticipated South Dakota v. Wayfair case. The impact of this decision will dramatically change the U.S. sales and use tax landscape. All U.S. states will now be able to follow South Dakota and establish bright line sales/use tax nexus standards in their sales tax legislation, requiring out-of-state online vendors to register and collect state sales tax, based on sales volumes or sales amounts into a state.
In a 5-4 decision, the Court held that the physical presence rule for state tax jurisdiction is incorrect and not a requirement under the Commerce Clause of the U.S. Constitution. The Court’s Wayfair opinion is likely the most significant state tax decision from the Court in at least 50 years.
• The Supreme Court overturned the physical presence requirement for state tax jurisdiction.
• The Supreme Court upheld South Dakota’s economic presence nexus statute for sales and use tax collection.
• States will not be required to prove that a seller has a physical presence in their state before they require the seller to collect their sales tax.
• Wayfair will have a wide-ranging impact beyond sales and use taxes and internet retailers.
The Wayfair case specifically deals with the ability of a state to impose sales tax on a retailer that does not have a physical presence in the state. The issue stems from a 1992 decision of Quill Corp. v. North Dakota where the Supreme Court ruled that a state could not impose sales and use tax on an out-of-state corporation if that corporation did not have a physical presence in that particular state.
South Dakota’s law requires out-of-state online retailers with at least $100,000 in sales or 200 or more separate transactions in South Dakota to charge sales tax on sales to South Dakota residents. In the 5-4 vote, the U.S. Supreme Court overturned Quill and held that a physical presence standard is not necessary. As a result, states may be allowed to collect sales tax from online retailers that do not have a physical presence in that particular state.
What is next?
The impact of the decision extends beyond internet retailers and beyond sales and use taxes.
Overnight, remote sellers, marketplace facilitators, service providers, licensors of software, and other businesses that have provided services to, or delivered their products to, customers from a remote location will have to start complying with state and local sales and use taxes. The Court’s Wayfair decision seems to place substantial confidence in sales and use tax automated compliance software and its continuing evolution, but the devil is in the details. Not only must sales tax compliance software fit a particular remote seller’s or service provider’s business parameters, it must also be capable of administering sales and use tax compliance across numerous state and local jurisdictions, a myriad of often changing exemptions, managing different product and service taxability definitions across states, and other necessary features.
Will Congress finally be motivated to act? South Dakota v. Wayfair case may prompt Congress to consider legislation to provide a national standard for online sales and use tax collection. There are several proposals being discussed, such as the Remote Transactions Parity Act, the Marketplace Fairness Act, and a proposal by Rep. Bob Goodlatte, R-Va., that would make the sales tax a business obligation rather than a consumer obligation. Under that proposal, sales tax would be collected based on the tax rate where the company is located but would be remitted to the jurisdiction where the customer is located.
Following this ruling, WNDE suggests that clients with online sales conduct a review of their state by state nexus profile, and the process of collecting and remitting sales tax. If you wish to discuss the impact of the South Dakota v. Wayfair ruling on your business, or would like assistance in determining your sales and use tax nexus by state, contact your WNDE tax professional.