In a move that could have significant implications on the way businesses collect and consumers pay sales tax, the US Supreme Court agreed on January 12, 2018 to hear the case of South Dakota v. Wayfair Inc. To understand the importance of this move and potential business impacts, we must first examine the 1992 Quill decision that was issued by the Supreme Court.
Under the Quill decision a state cannot require an out-of-state business to collect its sales & use taxes unless the business has a physical presence in the state.
Under the Quill physical presence standard, many remote sellers, including ecommerce retailers, aren’t required to collect sales tax because they don’t have a physical presence in every state where they make sales. As technology evolved and ecommerce became a mainstay in the years following the 1992 Quill decision, the states have raised concerns about the significant amount of sales tax revenue that they’re losing as a result of the physical presence standard. Businesses argue that being required to collect sales tax in states where they don’t have a physical presence places an undue burden on interstate commerce since tax laws and reporting procedures vary greatly by state.
The states have made attempts to ease the compliance burden on remote sellers by streamlining, or moving toward, more uniform reporting procedures. However, only approximately half of the states that impose a sales tax have joined these efforts. Attempts have been made to get Congress to enact new legislation that would allow the states to impose sales tax collection requirements on remote sellers. While new legislation has been introduced, attempts to get it passed have failed.
In an effort to force the Supreme Court to revisit the Quill decision, some states have enacted new state specific legislation that ignores the physical presence standard in favor of an economic presence standard. Meaning, if sales to consumers in the state exceed a specific dollar value the remote seller is required to collect state sales tax.
South Dakota enacted new legislation in 2016 effectively instituting an economic standard that requires sales tax collection and remittance for any business exceeding annual sales of $100,000 or 200 separate transactions. After the new law went into effect, South Dakota filed suit against multiple businesses, including Wayfair, for back due sales taxes. The South Dakota Supreme Court ruled on September 13, 2017 that the new law directly conflicted with the Quill decision and was therefore struck down [South Dakota v. Wayfair, Inc., South Dakota Supreme Court, No. 28160, September 13, 2017].
It’s expected that the US Supreme will rule by the end of June 2018. If the US Supreme Court rules in favor of South Dakota, businesses, including small and mid-sized companies, will have sales tax collection responsibilities in essentially all states where they make sales, regardless of whether they have a physical presence in the state. This will likely require these businesses to make investments in compliance software and/or people to manage the invoicing and compliance process.