On June 21st, the U.S. Supreme Court reversed the long-standing Quill v. North Dakota ruling when it stated that physical presence is no longer a requirement for states to assess sales taxes. In this landmark court case, South Dakota v. Wayfair, the State argued that the physical presence requirement was creating “unfair and unjust” market conditions favoring out-of-state sellers and resulting in significant revenue losses to the States. Wayfair argued that removing the physical presence barrier would subject them to unreasonable compliance expectations. The Court ruled in favor of the State in a 5-4 vote.
More Details about the South Dakota v. Wayfair
Wayfair is an e-commerce retailer of furniture and home goods, and they do not have a physical presence in South Dakota. In its targeted advertisements to South Dakota customers, Wayfair boasted that “[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.” Since South Dakota does not have an income tax regime in place, it relies on sales and use tax revenue to fund the operations of its state and local governments. In order to counteract the loss of revenue from online sales, in 2016, South Dakota enacted an economic nexus law requiring out-of-state retailers to collect and remit sales tax to South Dakota if annually they delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state. Realizing that the new law could be considered unconstitutional under the physical presence requirement established in Quill, South Dakota filed a declaratory judgment action against three large retailers with no physical presence in the state: Wayfair Inc., Overstock.com, and Newegg Inc. Following state court decisions in favor of the retailers, South Dakota appealed to the U.S. Supreme Court.
Reversing Quill v. North Dakota
The Court’s decision in Quill was predicated on the Commerce Clause, a legal doctrine that prohibits any state legislation that would inhibit interstate commerce. Of course, today’s interstate commerce climate differs drastically from the facts in the Quill case, which had been decided during a time when interstate commerce dealt mostly with catalog sales. In Wayfair, the Court argued, “[b]y giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes, Quill’s physical presence rule has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” In a way, the State contended that the physical presence requirement was doing just what the Commerce Clause was seeking to prohibit: interference with “fair and just” interstate commerce.
What This Means for States
This ruling is not a green light for states to begin assessing sales taxes on out-of-state e-commerce businesses; they will have to alter their own laws first. California, which has a unique and complex set of sales tax laws in place, may only need to enact slight adjustments to existing legislation to begin collecting more revenue. We expect to see some states mimic South Dakota’s law, which requires retailers that meet the established gross sales and transaction volume thresholds to collect and remit sales taxes regardless of physical presence in the State.
Familiarity for Insurers
In an insurance company setting, states and localities impose premium taxes on the insurance premiums written within their jurisdiction. Therefore, the results of the Wayfair decision shift the corporate sales tax regime closer in line with how insurance companies are currently taxed on their gross premiums. With the additional compliance requirements effectuated by this case, online retailers may be able to look to the systems and software used by insurance companies for the tracking and maintenance of customer information by state and even by locality.
South Dakota v. Wayfair brings sweeping changes to considerations of nexus and sales tax laws. It has the potential to change how interstate commerce is viewed drastically, and some wonder if it’s just the beginning on the long road to a unified national sales tax law. And even though consumers will be the ones left holding the sales tax bill, e-commerce businesses will be required to reevaluate their business models and compliance requirements. Complying with every state’s sales tax laws will be burdensome and costly. If you are wondering how this will affect you in the short and long term, JLK Rosenberger can help.