In a 5-4 decision authored by Justice Anthony Kennedy, the Supreme Court reversed the prior decision in Quill Corp. v. North Dakota, which held that a state could not require a retailer from another state with no physical presence in the state to collect and remit sales tax on goods the seller ships to purchasers in the other state. This decision in South Dakota v. Wayfair Inc. dramatically changed a limitation in effect since 1992 protecting small retailers from the potentially burdensome task of collecting and remitting sales tax in multiple states.
South Dakota’s law created an economic nexus standard for collecting and remitting sales tax based upon gross revenue (more than $100,000) or number of transactions (more than 200 transactions) in lieu of the physical presence that was established in the prior Quill Corp. v. North Dakota case.
In deciding whether a state tax is constitutional, since 1977, the Supreme Court has used the four-prong test established in Complete Auto Transit Inc. v. Brady. The test evaluates: (1) substantial nexus, (2) nondiscrimination, (3) fair apportionment and (4) fair relationship to services provided to the state.
In Quill Corp. v. North Dakota, the court held that only physical presence meets the substantial nexus test. Overturning the decision in Quill Corp. v. North Dakota, the Supreme Court concluded, “The physical presence rule in Quill is unsound and incorrect. … The physical presence rule has long been criticized as giving out-of-state sellers an advantage. Each year, it becomes further removed from economic reality and results in significant revenue losses to the states. These critiques underscore that the rule is an incorrect interpretation of the Commerce Clause. … The physical presence rule of Quill is also an extraordinary imposition by the judiciary on the state’s authority to collect taxes and perform critical public functions.”
With the Supreme Court now opening the door to allowing individual states the opportunity to require retailers with a sufficient volume of transactions and no physical presence to collect and remit sales tax, the next step for states desiring to take advantage of this new opportunity would be to enact legislation that is likely to comply with the economic nexus standard. Currently, 45 states have some form of sales tax (the exceptions being Alaska, Delaware, Montana, New Hampshire and Oregon). While some states have subsequently enacted statutes that contain economic nexus provisions similar to that of South Dakota, senators from three no-sales-tax states (Oregon, Montana and New Hampshire) have introduced and/or cosponsored Senate Bill 3180 titled “Stop Taxing Our Potential Act of 2018,” which would prohibit states from imposing a tax collection obligation on any business unless the business had physical presence in that state. This bill has been referred to the Senate Finance Committee for further review.
Given this new sales tax environment, multistate retailers must implement systems to understand in which states they may now have a sales tax obligation and processes to comply with these obligations.
Please consult your tax adviser to determine how these laws impact your specific situation.
Joel A. Bock, CPA, MST is a partner in Daniells Phillips Vaughan & Bock, a Bakersfield accounting firm.