On Jan. 12, the U.S. Supreme Court agreed to hear a case1 that could require collection of sales tax even if the seller does not have physical presence in the state of delivery. The case would overturn the 26-year-old Quill Corp. v. North Dakota standard that permits states to impose sales taxes only on those out-of-state sellers that have a physical presence in the state.
In 1992, long before the revolution of e-commerce, the Supreme Court ruled in Quill that North Dakota could not compel an out-of-state retailer with no physical presence in the state to collect North Dakota sales tax from its customers. Many states have seen an erosion of their sales tax base as consumers have shifted toward e-commerce purchases and away from brick-and-mortar retailers.
In response to the erosion of its sales tax base, South Dakota enacted an economic nexus rule that imposes sales tax collection duties on remote sellers whose gross revenue from in-state sales exceeds $100,000 or whose in-state sales amount to 200 or more separate transactions.2 Other states have followed South Dakota in enacting economic nexus laws.
Any remote seller that potentially has economic nexus should start contingency planning now given that some of the Supreme Court justices already have indicated a willingness to change the rule. Justice Anthony Kennedy in a concurring opinion in Direct Marketing Association v. Brohl advocated for re-examining Quill, stating that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”3
Remote sellers’ contingency planning should determine whether their systems and processes can identify taxable transactions, apply the applicable state and local rates, and ascertain which customers are exempt.
Remote sellers also should monitor legislative activity at the federal level because Congress has the jurisdiction to enact laws that regulate interstate commerce and might pre-empt or limit states’ imposition of economic nexus.
Sellers in states that already have passed economic nexus laws should prioritize compliance measures and consider the voluntary disclosure programs in those states.
1 State v. Wayfair Inc., 2017 S.D. 56, 901 N.W.2d 754, cert. granted sub nom. S. Dakota v. Wayfair, Inc., No. 17-494, 2018 WL 386568 (U.S. Jan. 12, 2018).
2 S.D. Codified Laws Section 10-64-2 (effective May 1, 2016).
3 Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring).