In a decision that will significantly impact the $450 billion U.S. e-commerce industry, the Supreme Court ruled that states can require sellers to collect and remit sales taxes even if the online retailers have no physical presence in the state. The Court’s 5-4 decision in the controversial case of South Dakota v. Wayfair, Inc. overturned its 1992 ruling in Quill Corp. v. North Dakota, which held that states can only require sellers with a physical presence in their states to collect sales taxes.
In the majority opinion, Justice Kennedy wrote that the Court cannot decide this case under Stare decisis (or according to precedent), calling the Court’s prior decisions in both Quill and National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967) “unsound and incorrect” and, further, as establishing “a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers.” The opinion reasoned that the daily functions of marketing and distribution in the modern economy and e-commerce which, according to the Court, do not align with the sort of arbitrary, formalistic distinction of the physical presence standard. Finally, the sovereign authority of states to collect taxes is impaired by the requirement that a seller have physical presence in the taxing state.
Chief Justice Roberts, in his dissent, acknowledged that the “Internet’s prevalence and power have changed the dynamics of the national economy” but decried the majority’s decision to abandon Quill: “[a]ny alteration to those rules with the potential to disrupt a critical segment of the economy should be undertaken by Congress.” Chief Justice Roberts also noted the substantial burdens placed upon retailers in calculating and remitting sales tax to over 10,000 taxing jurisdictions with varying different tax rates, exemptions, statutory definitions, and nexus standards.
The South Dakota statute at the heart of the case requires online sellers to collect and remit sales taxes on all of their transactions within the state if they annually deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the state. South Dakota is not the only state to adopt such legislation in recent years. This decision allows states across the country with similar statutes, and potentially lower thresholds, to subject online and mail order retailers to sales tax collection and remittance obligations across the entire country. What remains unclear is whether states will be able to abandon all thresholds and require any retailer with even a single, small sale transaction into the state to register for, collect, and remit sales tax.
The Court is leaving the issue of retroactivity for Congress to decide as South Dakota’s statute does not apply retroactively. Other states, however, may decide to apply their remote seller sales tax statutes retroactively, requiring retailers to comply with a statute for prior years.
Sellers must be aware of their online and mail-order sales into other states and determine, annually for each state, whether their activities subject them to sales tax collection and remittance obligations. Sellers should also be aware of the various taxing jurisdictions within each state that may apply varying tax rates.
For additional information, please contact Charlie Trost, Mike Yopp, Chris Wilson, Sarah Bothma or any member of Waller’s State and Local Tax practice.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.