On June 21, 2018, the Supreme Court ruled that states have the authority to tax online retailers and that online shoppers may be charged sales tax by foreign (out-of-state) businesses if the state requires it. This ruling was the result of a 5 to 4 vote on the case of South Dakota V. Wayfair Inc. and overturns the decades-old physical presence threshold set in 1992 by the Supreme Court’s decision in Quill V. North Dakota. In practical terms, what this decision means is that a business may now collect and remit a state’s sales tax even when shipping a product to a state where it does not have an office, warehouse, employee(s), or other physical presence.
Although it is relatively rare for justices to overturn prior precedents, Thursday’s action should not be a shock. The factors that guided the Supreme Court in ruling against states taxing online retailers in Quill are not what they are today. In 1992, when Quill was decided, online sales giants like Amazon did not exist, nor did high-speed internet. Today, however, these are commonplace, and they have revolutionized the environment in which companies do business. An ever-increasing number of households are making most of their necessary everyday purchases online, and more businesses than ever are benefiting from the expansive reach and convenience of the internet marketplace. These changes have necessarily shifted the perception of what “presence” means in terms of economic activity. In fact, in the weeks leading up to Thursday’s decision, the Trump administration requested that the Supreme Court side with South Dakota, and said the 1992 decision is “badly reasoned and has proved unworkable in the age of modern e-commerce”. Following the decision on Thursday, the President tweeted “About time! Big victory for fairness and for our country” referring to the way this ruling will benefit brick-and-mortar, mom-and-pop stores. Many of these have been feeling the pain not only of losing their local business to online mega-retailers but also of still being on the hook for sales tax in their home states while their internet competitors are not because of the outdated physical presence requirement set by the Quill decision.
A Foreseeable Trend
South Dakota’s “win” means that it and other states now have the jurisdiction to tax out-of-state businesses that fall within the economic nexus thresholds written in their sales and use tax laws. In South Dakota, an economic presence requiring the collection of sales and use tax would be established if an entity had annual sales exceeding $100,000 or engaged in 200 or more separate transactions; however, other states may impose different thresholds. As a result of the Supreme Court’s decision, the 16 states that already have economic nexus standards may begin collecting revenue from foreign companies immediately. Many other states that have not yet adopted economic nexus standards will be addressing the issue soon, as the prospect of an estimated $8 – $12 billion in additional state tax revenues has legislatures chomping at the bit.
Businesses that sell products online must continue to evaluate their online sales processes and assess whether their total sales and/or the number of completed transactions exceed the minimum thresholds established by the states which have enacted economic nexus standards. If these thresholds are exceeded, registering for the collection and remittance of sales tax in these states must become a serious business consideration, and customers should be notified. In addition, taxpayers should stay informed about both passed and proposed legislation by states that are joining South Dakota and other economic nexus jurisdictions which have extended their reach for collecting sales tax to out-of-state sellers. Although Wayfair is a sales tax case, more aggressive states may attempt to argue that it opens the door to establishing income and franchise tax nexus standards. If a business is not otherwise protected by Public Law 86-272, there may be new income and franchise tax nexus issues to consider.
We believe the Court’s decision will have a significant impact on businesses across a wide range of industries. Any companies that sell products or services in multiple states in fields as varied as manufacturing, distribution, construction, software, healthcare, professional services, and many others may be affected whether they are brick-and-mortar or internet-based.