U.S. Supreme Court Decision on State Sales Taxes for eCommerce

The United States Supreme Court (USSC) handed down a decision today in a much anticipated case dealing with sales taxes for eCommerce, though its implications will impact any company making sales to end users in states where they have no physical presence. In the case of South Dakota v. Wayfair, Inc., Et Al No. 17-494 (please click here for a copy of the case) the USSC held that the physical presence standard, which the Supreme Court itself had followed in its earlier Quill decision in 1992 (Quill v. North Dakota), no longer applies due to the changing nature of shopping over recent years. In a 5-4 decision, Justice Kennedy, writing the majority opinion for the court noted, that the “physical presence rule becomes further removed from economic reality” and thus results in sizable lost tax revenues to the states.

Background

Prior to today’s case, the USSC decision in Quill was the standard for a state imposing a sales tax for out-of-state sellers. Quill, in effect, prevented states from requiring retailers to collect and pay in sales tax on sales to consumers unless the retailer maintained a physical presence in a state. South Dakota embarked on a course to overturn Quill when it enacted legislation in 2016 that defied this physical presence standard, and instead implemented an economic presence standard. This new standard imposed a requirement to collect sales tax in South Dakota if the businesses had over 200 sales transactions in the state or over $100,000 of total sales for the year. Soon after enacting its legislation, South Dakota brought an action against an out-of-state company, Wayfair, which had no physical presence in South Dakota, but met their new economic presence standard. The case then moved quickly through the courts and found its way to the USSC docket earlier this year.

Impact of Today’s Ruling

Many parties are impacted by today’s USSC decision in Wayfair:

Online retailers will need to determine the impact to sales they make to each state in which they have customers. This could be an added expense and an administrative headache in sorting out the rules in numerous states. Traditional brick and mortar stores will not be as impacted; they are already collecting and remitting sales tax in the states they now have stores in, since they meet the physical presence standard under the prior rules of Quill. The competitive disadvantage they felt toward online retailers under the Quill standard is now being eased.

Other businesses selling taxable products or services to end users may be required by states to collect sales taxes similar to what online retailers will be forced to do since they also are no longer able to rely on the fact that they do not have any physical presence in such states.

Consumers may be most impacted as they will be the ones bearing the burden of paying the sales tax on the various online purchases they now make; on many of which no sales tax was paid. Arguably, they still had an obligation to remit this tax, but under the Wayfair ruling today, it will be easier for states to collect this tax.

Finally, most states have long sought to tax online sales and many had started down the path that South Dakota went and were looking at similar economic nexus standards. They will all be carefully examining the Wayfair decision and looking to enact legislation or adapting their state laws to fall in line with the Court’s decision.

A few other comments on today’s ruling:

• One of the key reasons the physical presence standard was established in the first place was because of the excessive compliance burden that would be placed on remote retailers to have to collect sales taxes in multiple states. The Court did not conclude that the compliance burden is no longer excessive, but concluded that the physical presence standard was an inappropriate test. The Court stated in its ruling “The physical presence rule is a poor proxy for the compliance costs faced by companies that do business in multiple states.”
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• Second, it should be noted that although the holding does effectively overrule the Quill physical presence standard, the case is technically not over as it was remanded back to South Dakota to determine if the remote collection law otherwise meets the guidelines for the Constitution’s Commerce Clause. In doing so, the Court pointed out that the South Dakota law provides several mechanisms that should make a strong case for it to meet the general Commerce Clause requirements.

Takeaways

There will be much discussion in the coming weeks about this Wayfair decision. States are eagerly awaiting the opportunity to collect additional tax revenues, while online companies re-group to assess how their business model will change. At Sikich, we will be following these developments and offer additional updates, articles, and planning observations as we analyze the aftermath of today’s ruling.

Please contact your Sikich advisor for any questions you may have.