September 10, 2018 | Court Rulings
The recent Wayfair decision by the U.S. Supreme Court has had a major impact on states that want to collect sales and use taxes. Before this case, economic “nexus” for tax purposes was established only if the seller of goods or services exhibited a “physical presence” in the state. After Wayfair, sales and use tax obligations may be assigned to remote sellers—even those who operate online only. (South Dakota v. Wayfair, S. Ct. No. 17-494, June 21, 2018)
Brick-and-mortar stores are delighted by this ruling as they had complained for years that online sellers had a competitive edge. And in the face of mounting pressure to balance their budgets, some states tried to generate additional sales tax revenue from online sellers that sold their merchandise to residents in their states.
The taxing online sales issue relates back to an interpretation of the “commerce clause” in the U.S. Constitution. The clause allows states to require the collection of sales and use taxes if these four requirements are met:
- The seller has a substantial nexus in the taxing state.
- Taxes are fairly apportioned.
- Taxes don’t discriminate against interstate commerce.
- Taxes fairly relate to the services provided by the taxing state.
The physical presence requirement was solidified over 25 years ago by the Supreme Court in Quill v. North Dakota (504 U.S. 298, May 26, 1992)
In Quill, the Court rules that North Dakota could not require sellers to collect and remit use tax when the seller did not have a physical presence in the state, such as a sales office or a warehouse. It was often cited in cases involving mail-order sales. Since then, states have aggressively pursued nexus policies constituting a physical presence.
States have been targeting online sellers recently, including major players in the field such as Amazon. These laws are often dubbed “Amazon laws” as a result. Actually, Amazon and some other nationally known companies have voluntarily adhered to state and use tax requirements on the products they have sold directly. (Third-party merchants selling on the Amazon platform did not necessarily collect sales taxes.)
New State Tax Environment
The Wayfair case brought the constitutional conflict to a head. Under a South Dakota law, a remote seller was required to collect and remit sales tax if:
- The seller had gross revenue from goods and services exceeding $100,000 in the current or previous tax year, and
- Taxable goods and services were sold for delivery within the state in 200 or more separate transactions.
As a result, South Dakota assessed sales tax jurisdiction over a small group of remote sellers, including the retailer Wayfair. The matter went to court.
The lower courts in South Dakota affirmed the Quill precedent, but then the Supreme Court agreed to review the outcome. Ultimately, the Court overturned the physical presence standard that had been long required by Quill and remanded the case back to the district court.
There is an important caveat, however: While Wayfair strikes down the physical presence requirement, it should not be viewed as a blanket approval for all state laws establishing nexus for remote sellers. The Court noted that the South Dakota law:
- Provides a “de minimis” exception protecting certain small sellers,
- Is not retroactive, and
- Complies with guidelines of a multistate streamlined sales and use tax agreement (SSUTA).
As a result, Wayfair does not validate every state law that assesses sales tax on remote sellers.
Plus, some states have “sleeper laws” that assert nexus to the full extent allowed by the U.S. Constitution, or, by their plain language, go beyond the physical presence standard Quill previously imposed. These states have already adopted regulations, otherwise modified their laws, or are expected to do so in order to conform to Wayfair.
Impact of the Wayfair Decision
Wayfair is having a tax impact across the country. It has eased the way for states to assert sales and use tax nexus against remote sellers who have a virtual or economic presence within their boundaries, but there are limits.
Sellers with a major virtual or economic presence—but not necessarily a physical one—have been put on alert. Conversely, smaller sellers that only meet face-to-face with customers inside a state, with almost no other contact outside that state, likely won’t be affected.
Sellers of all shapes and sizes should examine their policies in light of this ruling despite the limitations. It is particularly important to consider the extended reach of your firm’s advertising and marketing efforts. A business can no longer assume that activities are limited to a single state.
In addition, courts will likely need to address related issues in the future, such as e-commerce functions such as websites that leave “cookies” on hard drives and apps that enable downloads on smartphones and tablets. The Supreme Court ruling in Wayfair cited the existence of cookies as an issue in the physical presence standard. This may lead to another court ruling.
We have definitely not heard the end of this matter. Contact us for the latest development regarding how your business is affected by Maine state rules for economic nexus related to sales and use tax collections.