In 2016, the South Dakota Legislature enacted a sales tax law requiring retailers located outside the State to collect and remit South Dakota sales tax on sales to South Dakota customers “as if the seller had a physical presence in” South Dakota. The law applies to sellers who have sales of goods or services into the State over $100,000 annually or who engage in 200 or more separate transactions into the State. Several retailers prevailed in the lower courts, successfully arguing that the U.S. Supreme Court opinions in National Bellas Hess, Inc. v. Dept. of Revenue of Ill. (1967) and Quill Corp. v. North Dakota (1992) required that the retailer have a physical presence in the taxing state in order for the state to have nexus to impose the sales tax collection obligation. South Dakota sought review by the U.S. Supreme Court, advocating that National Bellas Hess and Quill were outdated and erroneous.
On June 21, 2018, the U.S. Supreme Court issued a landmark decision on a 5-4 vote in the South Dakota v. Wayfair case, greatly expanding the power of states to impose sales tax collection obligations on out-of-state sellers. The Court overruled National Bellas Hess and Quill, eliminating the physical presence test that generally prohibited a state from imposing a sales tax collection obligation on a retailer not physically located in the state.
Wayfair establishes that physical presence of a remote seller is no longer the key consideration in determining whether the seller has sales tax nexus with the taxing state. Under Wayfair, a state can impose on a remote seller a duty to collect and remit sales tax so long as the tax does not violate any of the four parts of the Complete Auto Transit v. Brady dormant Commerce Clause test: does the tax (1) apply to an activity with a substantial nexus with the taxing State, (2) is it fairly apportioned, (3) does it discriminate against interstate commerce, and (4) is it fairly related to the services the State provide? The Court determined that the South Dakota’s sales tax law on remote sellers met the first part of the Complete Auto test because the taxes apply only to sellers who conduct a substantial quantity of business with South Dakota and the taxpayer-litigants in the case before the Court were large national companies with an extensive virtual presence. The Court also noted that South Dakota is a participant in the Streamlined Sales and Use Tax Act, which provides a (somewhat) uniform set of sales tax rules for member states. The Court remanded the case back to the lower court to evaluate any remaining claims regarding the Commerce Clause’s applicability to South Dakota’s sales tax law.
The practical effect of this decision will be to empower states’ revenue departments and legislatures to enact laws and adopt rules that impose sales tax collection obligations on remote sellers. While South Dakota’s law complied with the “substantial nexus” requirement, it is unclear from the Court’s opinion whether states could adopt lower thresholds for dollar value or quantity of sales and still be in compliance with the Commerce Clause, or whether participation in the Streamlined Sales and Use Tax Agreement will be a critical factor in lower courts’ analyses of other states’ remote seller laws and rules.
We anticipate states will respond quickly to this development, and Congressional action may be forthcoming if the states’ reactions create upheaval among consumers and businesses. Nelson Mullins’ tax and government relations lawyers will be following these developments and will be ready for inquiries from clients on sales tax legislation and compliance issues.