Sales Tax Nexus on Trial before US Supreme Court
In Quill Corp v. North Dakota, which was decided in 1992, the Supreme Court ruled that a business must have a physical presence in a state to satisfy the “substantial nexus” required for the collection of sales tax. Under this rule, an internet retailer who only makes sales into the state and has no other contact does not have substantial nexus and, therefore, is not required to collect sales tax. This has been the rule businesses have been following for 25+ years.
As e-commerce continues to grow, the states are seeing more and more lost sales tax revenue from internet sales. As a result, states have been looking for ways to collect tax from the online customers of out-of-state retailers. In 2016, Governor Daugaard of South Dakota signed Senate Bill 106 into law. This law requires out-of-state sellers to collect and remit sales tax if their sales into the state exceed $100,000 or 200 separate transactions. I had previously written an article on this rule, along with other state rules, which can be viewed here.
South Dakota v. Wayfair
On Tuesday, April 17, the Supreme Court heard the oral arguments for South Dakota v. Wayfair, Inc., which will determine whether Quill will continue to be the standard or will be overturned. Wayfair, Inc., as you may know, is an online retailer – and is subject to South Dakota’s law requiring them to collect sales tax even though Wayfair has no physical presence in the state. There were a few key arguments that came up, and it seemed that nobody had an answer to these issues.
South Dakota made the point that small businesses are being harmed because of the unlevel playing field created by giving out-of-state retailers a price advantage. However, the cost to small businesses to comply with new requirements in other states was a hot topic of discussion. South Dakota argued that entrepreneurs would rise to the challenge and offer software to handle these issues at a low cost to the retailers. Wayfair argued that even if a software can handle the 12,000+ jurisdictions’ tax rates there are other issues such as the fact that common products can be defined differently under different state laws. And not only that: the necessary record retention for exempt buyers, exempt transactions, or exempt uses is a manual process that arguably cannot be performed by software.
Another question brought up by this case is how much is enough to create nexus in a state? If it is not a physical presence, is it a dollar amount of sales or a volume of transactions such as what South Dakota is using? The Petitioner argued that the standard would go back to previous court precedents, but the Justices did express concern about the number of court cases that may occur if they were to overturn Quill. They also expressed concern over whether states would collect tax retroactively, although the Petitioner argued that most states have laws barring them from doing so. The issue of whether this is something that is more appropriately handled by Congress came up many times during the proceeding.
If the court decides to overturn Quill, we will likely see many states adopting rules requiring out-of-state sellers to collect and remit tax. If the court decides not to overturn Quill, many states will most likely adopt a rule similar to what Colorado and Pennsylvania have enacted – a reporting requirement that if the business does not collect and remit tax in the state, they must issue a statement to the customer that they may be responsible for remitting tax, along with a statement of the customer’s purchases at the end of the year for which they are required to remit use tax. Furthermore, they would also report this information to the state. This type of rule encourages a seller to collect and remit use tax, which they may find simpler than complying with the reporting requirement.
Either way, it appears that the sales tax landscape will be changing, and states will continue to be aggressive in asserting collection requirements on online retailers.
For questions about this article or for more information regarding our State and Local Tax practice, please contact Michael Eby, Senior Manager/SALT Leader, at meby@macpas.com or Lindsey Waltemyer, Supervisor/ SALT Member, at lwaltemyer@macpas.com.
