South Dakota v. Wayfair: What to know and how to prepare
5 questions your company should ask to be ready for any outcome
INSIGHT ARTICLE |
UPDATED June 21, 2018: Read the final Court decision
This term, the U.S. Supreme Court will revisit the issue of state tax nexus for the first time in 26 years. On Jan. 12, 2018, the court granted certiorari in South Dakota v. Wayfair, Inc., et al (Docket No. 17-494), which challenges the “physical presence” nexus standard set forth in the 1992 landmark decision Quill v. North Dakota. Should the court decide to overturn its prior ruling, the decision could have monumental implications for sales and use tax nexus. You can follow our coverage of the court case here. No matter how the court ultimately rules, businesses with sales in multiple states need to be aware. Below are five questions and answers to help you and your business get up to speed on the case:
1) What is South Dakota v. Wayfair?
South Dakota v. Wayfair addresses the validity of South Dakota S.B. 106, a statute that imposes an “economic sales tax nexus standard” on out-of-state sellers. Specifically, the statute obliges remote sellers to collect and remit sales tax if they have over $100,000 of sales to, or engage in 200 or more transactions with, South Dakota customers – even if the remote seller has no physical presence in the state. That provision is contrary to the “physical presence” standard adopted in the Quill ruling. The law was challenged by several online retailers and litigated in state court. The South Dakota Supreme Court found that the law was in direct conflict with Quill and was therefore invalid. South Dakota appealed the decision to the United States Supreme Court, which will hear oral argument on the case on April 17, 2018.
2) What was Quill v. North Dakota?
Quill Corporation (Quill) was a mail-order distributor of office equipment and supplies that sold its products into North Dakota through advertisements, catalogs, and telemarketing. Customer orders were shipped to the state through the U.S. Mail or a designated common carrier. Quill did not maintain any physical offices, retail locations, warehouses, employees, or other property in the State; in essence, it had no physical presence in North Dakota.
Quill did not collect the state use tax on sales to its North Dakota customers, which resulted in assessments from the State Tax Commission. On appeal, the Court was asked to decide whether North Dakota could require an out-of-state mail-order retailer, with no physical presence in the state, to collect a use tax on goods purchased by North Dakota customers. The court ruled that under the Commerce Clause of the U.S. Constitution, an out-of-state seller cannot be required to collect and remit sales tax on remote sales made to an in-state purchaser absent a physical presence in that state.
3) Why is Quill challenged now after 26 years?
Under Quill, a seller is subject to a state’s sales and use tax if it has established a physical presence in that state; remote sellers are not required to collect sales tax on sales made to customers in states where the seller is not physically present. Accordingly, the in-state purchaser is not charged the sales tax. However, sales tax free does not mean the purchase is “tax free.” In-state purchasers that have not paid a sales tax are generally required to remit a complementary use tax on taxable goods or services. The use tax is typically charged at the same rate as the sales tax.
Importantly, use tax non-compliance is common – particularly among individual purchasers. The failure to remit use taxes costs the states billions of dollars of estimated tax revenue per year. The rise of e-commerce has significantly increased the number of remote sales and further compounded the use tax non-compliance problem.
In his 2015 concurrence to a use tax reporting case, Justice Kennedy observed that declining tax revenues combined with technological advancements necessitated that the court revisit Quill. In response, the states began passing “economic sales tax nexus” provisions – beginning with Alabama, intending to re-litigate the physical presence standard.
4) What does the current economic sales tax nexus landscape look like?
As of February of 2018, Alabama, Indiana, Maine, Mississippi, North Dakota, Pennsylvania, South Dakota, Tennessee, Vermont, Washington, and Wyoming have addressed economic sales tax nexus in some form. However, several of those laws have either not been placed into effect or are currently the subject of litigation and enjoined from enforcement. A number of other states have proposed legislation to enact similar economic sales tax nexus provisions in 2018. For a more thorough discussion on the current landscape, please read our article Economic sales and use tax nexus laws.
5) What’s next?
Oral argument is scheduled for April 17, 2018. A decision is expected by the end of June. The U.S. Supreme Court will either re-affirm Quill, leaving in place the physical presence standard, or articulate a new standard, revising or eliminating the physical presence requirement. Regardless of the court’s decision, Congress has authority to pass legislation regulating sales taxes on remote commerce at any time.
What should your business be thinking about now?
While no one can predict how the court will rule, it is important that businesses prepare for all possible outcomes. Understanding your current nexus footprint is one of the first steps your business should consider. A sampling of important questions follows:
- When was the last time you performed a nexus analysis?
- What states are your employees or sales force visiting/conducting business?
- What activities do those employees/sales force perform in each state?
- Where is your inventory?
- Where and how much are your sales and services sold into each state?
- What products and services do you sell? Items and services in one state may be exempt from the sales and use tax, and taxable in another. Understanding how those items are characterized is important for multistate tax compliance.
- Where do you currently collect sales taxes?
- Have you considered a sales tax automation solution? A decision eliminating the physical presence requirement may result in taxpayers having to collect in many more jurisdictions – meaning increased hours devoted to compliance.
These are some of the questions that can help determine your nexus footprint, and prepare you for a number of potential outcomes from the Wayfair decision. With the wave of economic sales tax nexus laws in the last two years, a business’ nexus footprint may have changed dramatically without any change in business activities – and could change even more after Wayfair. Prepare now to save time later.
For more information and updates on the case, please read our Alert, U.S. Supreme Court to take up Quill Challenge, which will be updated as developments occur.