Supreme Court Overturns Sales Tax Nexus Ruling
On June 21, 2018, the United States Supreme Court issued a ruling in South Dakota v. Wayfair that overturned the physical presence standard issued in Quill v. North Dakota. Under the physical presence standard, a seller had to have property, employees, or some other type of physical connection with a state in order to be required to collect and remit sales tax. In overturning Quill v. North Dakota, the Court ruled that the physical presence rule outlined in Quill is “unsound and incorrect.” Essentially, it was determined that physical presence is not required to meet the “substantial nexus” requirement. The Court ruled in South Dakota v. Wayfair, that a substantial nexus exists between out-of-state retailers and South Dakota by way of economic nexus and virtual contacts with the state. Often, economic activity is calculated based on gross receipts derived from the applicable state.
As e-commerce has grown rapidly since the 1992 Quill ruling, states argued they were losing out on sales tax revenue since they were unable to tax sales made online via the internet under the physical presence standards. The impact of the decision is extensive, as states are now able to impose taxes on the sale of goods and services, regardless of whether or not the seller has a physical presence within the state; thus, the door is open for online sellers to collect sales tax. However, while the South Dakota v. Wayfair ruling eliminates the physical presence standard, by no means does this decision give states a free rein to subject any and all interstate commerce to state sales tax. States will still be required to limit their taxation to sellers and service providers who have substantial nexus with the state. The Court carefully analyzed South Dakota’s law to determine it was “designed to prevent discrimination against or undue burdens upon interstate commerce.” The Court pointed out that South Dakota’s law had several features designed to prevent undue burdens upon interstate commerce: (1) a safe harbor excluding those who sell with only limited amounts within South Dakota; (2) no retroactive tax collection; (3) single, state-level administration of sales tax; (4) a simplified tax structure; (5) uniform rules and definitions; and (6) provides sellers access to sales tax administration software provided by the state, with immunity for those relying on it. It is likely that other states will act swiftly to amend their sales tax statutes to reflect the features outlined in the Wayfair ruling and begin taxing any interstate commerce sales that have substantial nexus.
A state-by-state analysis of the facts and circumstances may be necessary to help your company determine the extent of the impact on your compliance obligations. Companies that are now subject to additional sales tax collection will incur additional administrative and compliance responsibilities. These responsibilities include, but are not limited to, registration with the states, rate determination, product or service taxability determinations, and obtaining exemption certificates. The oversight and compliance of sales tax can be overwhelming for any organization, especially when the tax rules are in flux. The impact of the Wayfair decision, and appropriate strategies to implement, will vary amongst businesses. Accordingly, please contact Cassady Schiller CPAs & Advisors for more information on the impact of the Wayfair decision, along with any other state and local tax issues facing your business.