On June 21, 2018, the Supreme Court of the United States issued a much anticipated decision in South Dakota v. Wayfair, Inc., No. 17-494, which involved a challenge to a South Dakota statute imposing a sales tax collection requirement on Internet retailers who sell merchandise or provide a service in South Dakota, even if the retailer has no physical presence or employees there. This 5–4 decision has far reaching implications for on-line sales, because it opens the door for any state to require Internet retailers to collect sales tax for in-state sales.
Previously, the case of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), controlled. In Quill, the Supreme Court ruled that the Commerce Clause of the United States Constitution requires that a tax have a “substantial nexus” with the activity being taxed. According to Quill, that nexus required more than just solicitations by mail and the shipment of goods to customers—it required a physical presence in the State. Quill has been overruled.
Stating that the Quill decision imposed a “serious inequity” to South Dakota, Justice Kennedy noted, “Each year, the physical presence rule becomes further removed from economic reality and results in significant losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.” On-line commerce no longer “aligns analytically” with a test based on physical presence alone. As a result, the South Dakota statute that requires on-line merchants to collect and remit sales tax “as if the seller had a physical presence in the state” is no longer offensive to the Constitution.
Note that the South Dakota statute was limited, and the Supreme Court’s analysis took the limited nature into consideration. For example, it applies to on-line sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods into the State; it is not applied retroactively; and South Dakota is a party to the Streamlined Sales and Use Tax Agreement. As a result, any state attempting a more broadly stated statute may encounter additional constitutional challenges.
We encourage any on-line retailer to closely monitor the tax laws applicable in any state in which it delivers a good or provides a service, particularly with regard to sales tax.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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