In South Dakota v. Wayfair, the U.S. Supreme Court overturned its 1992 decision in Quill Corp. v. North Dakota, which limited a state’s ability to impose its sales tax on an out-of-state retailer. In Quill, the court ruled
that only a retailer that had a physical presence in a state
by means of employees, stores, warehouses, or the like was
required to collect such state’s sales tax. The Quill decision is
one of the main reasons why many direct response marketers
have not had to collect sales tax for sales to out-of-state residents.
In recent years, states have tried all sorts of means to circumvent the Quill standard. For example, Colorado requires
out-of-state retailers to report information about sales to
Colorado residents, while Massachusetts tried (but eventually
backed off) to claim that cookies on a customer’s computer
created a physical presence in the state. Other states enacted “economic nexus” laws that intentionally flout the Quill
physical presence requirement by asserting nexus (or a “
sufficient connection” with the state) based on the number and/
or dollar amount of sales into the state.
South Dakota’s economic nexus law was at the heart of
the Wayfair case. About 15 states currently have some form
of such economic nexus laws that require remote retailers
that satisfy the economic nexus threshold to collect and
remit sales tax to the state regardless of the retailer’s degree of
physical presence in the state. Under this new decision, states
without economic nexus laws for sales tax purposes can be
expected to alter their existing standards to take advantage of
the Court’s liberalization of the rules.
To try to predict what the new sales tax standard may look
like, it is important to understand the details of the Wayfair
decision. The case involved three leading online direct retailers (Wayfair, Overstock, and Newegg) that challenged South
Dakota’s economic nexus law, which requires an out-of-state
retailer to collect sales tax if the retailer makes more than
$100,000 of taxable sales of property or services into the state
or makes taxable sales into South Dakota in
200 or more transactions.
With a 5-4 vote, Justice Anthony Kennedy authored the majority opinion, joined
by Justices Clarence Thomas, Ruth Bader
Ginsburg, Samuel Alito, and Neil Gorsuch.
Justices Thomas and Gorsuch filed concurring
opinions. Chief Justice John Roberts dissent-
ed, joined by Justices Stephen Breyer, Sonia Sotomayor, and
Elena Kagan. In dissent, Roberts agreed with the majority
opinion that the court’s prior rulings on this topic had been
“wrongly decided.” But he asserts that insufficient reasons
exist to overrule those precedents and that the Court should
leave Congress to address the issues as it is expressly author-
ized to do by the Commerce Clause.
The opinion lists three aspects of South Dakota’s tax
system as features that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.”
These features can be expected to guide other courts in
evaluating whether sales tax statutes of other states meet the
Commerce Clause’s requirements.
The first is that the South Dakota law, by means of the
dollar amount and volume of transaction thresholds, applies a
safe harbor to protect those retailers that transact only limited
business in South Dakota from having to comply with the law.
The second feature of the law is that by its own terms
it ensures that no obligation to remit the sales tax may be
applied retroactively. Whether such collection obligations
could and would be imposed retroactively by states for prior
years on remote retailers has been much debated. The Court’s
limited comment on retroactivity seems to dictate that such
collection obligations should not be imposed retroactively.
Third, South Dakota is one of more than 20 states that
have adopted the Streamlined Sales and Use Tax Agreement. This agreement serves to standardize taxes and reduce
administrative and compliance costs by requiring a single,
state-level tax administration, uniform definitions of products
and services, simplified tax rate structures, and other uniform
rules. It also provides sellers access to sales tax administration
software paid for by the state. Sellers that choose to use such
software are immune from audit liability. The court’s comment can be read as suggesting a requirement that a state be
a member of the agreement in order for its remote collection
law to be valid.
The Wayfair case now returns to the
South Dakota Supreme Court for implementation. Years of further proceedings are
expected across the 45 states that impose
sales tax, as unique situations in the states’
economic nexus laws are tested against
BY WALTER CALVERT AND TAMMARA LANGLIEB