South Dakota v. Wayfair: U.S. Supreme Court Overturns Quill
On June 21, 2018, the U.S. Supreme Court issued its highly anticipated decision in South Dakota v. Wayfair. In this 5-4 decision, the court overturned the requirement from its 1992 ruling in Quill Corp. v. North Dakota, which held that sellers must have a physical presence in a state before they can be required to collect sales tax there.
Even though many states may respond to Wayfair by seeking to adopt sales tax economic nexus laws like the ones in South Dakota, the court’s ruling does not automatically mean that South Dakota will be able to collect sales tax from all remote sellers, or even from Wayfair itself.
Even though Wayfair is a victory for South Dakota and states with similar sales tax economic nexus laws, the court acknowledged that there may be “other reasons” why Wayfair may still not be required to collect South Dakota’s sales tax. The court has now sent the case back to South Dakota so those reasons can be considered.
What we know now that Quill is overturned
- As described in our recent remote seller tax article, ever since 1992, states have stretched the Quill case’s physical presence nexus requirement in an attempt to expand their ability to collect sales tax from remote sellers. However, effective May 1, 2016, South Dakota enacted a law which asserted sales tax nexus over any seller with either $100,000 or more of in-state sales annually, or at least 200 transactions to in-state purchasers annually — even if the seller had no physical presence there (a so-called “remote seller”).
- As a result of the Wayfair ruling, states are no longer required to prove that a seller has a physical presence there before they may require the seller to collect their sales tax.
- The sales tax economic nexus standard used by South Dakota satisfies the requirements of the Commerce Clause because, when viewed in the context of other elements of South Dakota’s sales tax regime, it is not overly burdensome to remote sellers, including small businesses.
Specifically, the Wayfair court decision upheld South Dakota’s sales and transaction-based nexus threshold because it was paired with a non-retroactive application and with the state’s participation in the Streamlined Sales and Use Tax Agreement (SSUTA). As a result, many states may seek to adopt a sales tax framework like South Dakota’s to maximize the likelihood that the related economic nexus standards will be enforceable.
- The sales tax economic nexus standards used in other states may not be enforceable if, whether viewed on their own or in the context of those states’ sales tax laws overall, are more complex or expansive than the sales tax laws in South Dakota. For example, if a state’s sales and transaction-based nexus threshold is retroactive, or if the state has not adopted the simplification requirements of SSUTA, then that economic nexus threshold may not be enforceable even under Wayfair. In other words, Wayfair does not simply open the floodgates for all states with sales tax economic nexus standards to immediately start collecting sales tax from all remote sellers.
South Dakota will soon be back in the spotlight
Despite the Supreme Court’s conclusion that the lack of an in-state physical presence requirement didn’t invalidate South Dakota’s sales tax nexus law, the court still sent the case back to South Dakota to answer the question of “whether some other principle in the Court’s Commerce Clause doctrine might invalidate” that nexus law.
According to a press release issued by South Dakota, Department of Revenue Secretary Andy Gerlach says that the state will issue further guidance on these issues in the coming days.
Congress may feel increased pressure to resolve this issue legislatively
The court acknowledged that, in cases where a state’s sales tax regime is more complex or expansive than South Dakota’s, such as where there are differences in “the rate imposed” or “the categories of goods that are taxed,” or when there is no “software … available at a reasonable cost” to comply with these requirements, the compliance burdens placed on remote sellers may invalidate any economic nexus rules used in those states. As a result, the court acknowledged that “Congress may legislate to address these problems if it deems necessary and fit to do so.”
Thus, while the dissent argued that the majority’s holding dramatically reduces states’ incentives to seek a Congressional solution, the abrupt removal of the Quill physical presence requirement for nexus may prompt Congress to give renewed attention to the many legislative proposals (such as the Marketplace Fairness Act) it has considered for years to resolve these issues.
What to do now
While South Dakota considers what “other principles” must be met in order for it to collect sales tax from remote sellers, companies should prepare to register and collect tax.
This sales tax nexus assessment (“Wayfair checkup”) should include a comprehensive analysis of the company’s overall nexus profile and the practical aspects of collecting and remitting sales tax (e.g., collecting exemption documents, systems considerations, and overall process review). CLA’s state and local tax professionals can help guide you through this analysis.