Supreme Court Decision in Wayfair Overturns Physical Presence Standard for Remote Sales Tax Collection

| 6/25/2018
Supreme Court Decision in Wayfair Overturns Physical Presence Standard
On June 21, the U.S. Supreme Court issued a 5-4 decision in South Dakota v. Wayfair, Inc., allowing states to compel remote sellers to collect sales tax from customers even if the sellers do not have physical presence in the customers' state. This landmark case overturns the holding of Quill Corp. v. North Dakota, a 1992 Supreme Court case that required the remote seller to have physical presence in a state as a prerequisite to sales tax collection.

The South Dakota statute in question required a remote seller with no physical presence in the state to collect sales tax if it had either of the following:
  • 200 or more South Dakota annual sales orders
  • More than $100,000 in revenue from South Dakota
In the majority opinion, Justice Anthony Kennedy found that the South Dakota statute did not provide an unreasonable burden on small businesses for the following reasons:
  • The law at issue requires a merchant to collect the tax only if it does a considerable amount of business in the state.
  • The law is not retroactive.
  • South Dakota is a party to the Streamlined Sales and Use Tax Agreement.

Recommended Immediate Action Steps

  • Remote sellers should examine and prioritize their sales tax posture in those jurisdictions that currently allow for taxation of remote sellers who do not have physical presence in the jurisdiction.
  • Remote sellers should determine whether their systems and processes are able to identify taxable transactions.
  • Remote sellers should examine their potential exposure in those states that have enacted similar laws prior to the Wayfair decision and implement proactive courses of action (for example, prospective registration and voluntary disclosure agreements).

Other Considerations

In the 25 years since Quill, a number of other jurisdictions have enacted laws that challenged the physical requirement of Quill. The Supreme Court provided clarity around South Dakota’s remote sellers’ collection responsibilities, yet many issues remain in question, including:
  • The reasonableness of other similar remote seller laws where the annual sales volume and similar thresholds differ, especially in states with a nexus threshold lower than that of South Dakota
  • The impact on remote sellers whose sales are purely for resale and lack of clarity on the term “revenue” (whether it encompasses only taxable revenue or whether nontaxable revenue and freight are included in the thresholds)
  • The likely legislative landscape in the jurisdictions that currently do not have laws on the books allowing taxation of remote sellers sans physical presence, understanding that other legislatures likely will soon call for special sessions to enact similar legislation
  • Potential legislative action by Congress
  • The retroactivity of the decision in those states that had enacted similar economic presence statutes prior to this decision
 

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