In a closely watched case involving South Dakota’s 2016 law requiring the collection of state sales tax by out of state retailers who have no physical presence in the state, in a 5 to 4 decision, the Supreme Court yesterday decided to overturn two of its older decisions prohibiting the practice in South Dakota v. Wayfair, Inc. No. 17-494. Many states have been waiting for this decision and are likely to pass their own remote taxation laws, and online sellers will then need to collect and remit tax to each such state.
The prior case law required that only sellers with a physical presence in a state could be required to collect state sales tax (National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967) and Quill Corp. v. North Dakota, 504 U. S. 298 (1992)), but in the era of online sales, states were losing significant sales tax revenue because consumers did not remit the sales tax on their own.
Forty one states, the District of Columbia and two territories had requested the Supreme Court overturn the outdated cases. The question for the Court was whether South Dakota could "require remote sellers to collect and remit the tax without some additional connection to the State.” The Court recognized that one impact of the prior Quill decision was to put local businesses and businesses with a physical presence in South Dakota at a competitive disadvantage with remote sellers, who did not collect and remit sales taxes. Quill also discouraged the establishment of physical presences, whether storefronts or distribution centers, in an effort to avoid taxation.
In its effort to craft an acceptable statute, South Dakota enacted a law that required sellers to collect sales tax when they had an "economic nexus” with the state, which they defined as having either more than 200 separate transactions for delivery of goods into the state annually or an annual total of over $100,000 of goods or services delivered in South Dakota.
The Supreme Court held that this level of activity provided enough contact with the state to constitute sufficient nexus. South Dakota’s statute also provided other safeguards to minimize the administrative burden. It should be noted that Congress, through its power to regulate interstate commerce, has the power to legislate standards for sales tax collection, but has not exercised it and is unlikely to do so now. Presumably, other states will now follow this model, as a dozen already have, and remote sellers should hope that the other states hew closely to the standards the Supreme Court has approved; any deviation will only create uncertainty until the courts can rule again.
Retailers and other remote sellers need to act now to determine their sales tax collection obligations, and to consider what changes need to be made to their systems and their business models. The Supreme Court has now opened the door for states to collect much-needed sales tax revenue, and they will surely walk through it.