The U.S. Supreme Court Overturns Quill, Rules States Can Impose Sales Tax Collection Responsibilities on Remote Sellers

By: Chris Tracy, Principal, State and Local Tax

Chris Tracy

Principal, State & Local Tax

The U.S. Supreme Court Overturns Quill, Rules States Can Impose Sales Tax Collection Responsibilities on Remote Sellers

In a decision that will drastically change the sales tax compliance landscape for remote sellers, the U.S. Supreme Court (the “Court”) overturned its 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298, and ruled states have the authority to impose sales tax collection responsibilities on remote sellers. 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. Based on Quill’s physical presence standard, many remote sellers, including ecommerce retailers, aren’t required to collect sales tax because they don’t have employees, offices, inventory, etc. (i.e. a physical presence) in every state where they make sales.

For years, states have been very vocal about the amount of lost tax revenue resulting from remote sellers not having a legal requirement to collect sales tax from customers. Although consumers are legally required to remit tax on taxable sales directly to the states in situations where remote sellers don’t have a physical presence, many consumers don’t remit the tax.

In an effort to force the Court to revisit the physical presence standard, South Dakota enacted new legislation in 2016 effectively instituting an economic presence standard that requires sales tax collection and remittance for any business exceeding annual sales of $100,000 or 200 separate transactions to South Dakota customers. 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]. In January the Court agreed to hear the case and it was argued on April 17, 2018.

In overturning its prior decision, the Court stated the Quill ruling created “a tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers – something that has become easier and more prevalent as technology has advanced.” The Court concluded that “rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents.”

What to Expect Now

• This ruling is clearly a win for the states. Many have already enacted legislation similar to the South Dakota law that was reviewed by the Court which require businesses to collect sales tax when certain thresholds (sales, transaction volume, etc.) are met, regardless of whether the business has a physical presence. Expect the states to begin issuing implementation and compliance guidelines based on the Wayfair decision in short order. These guidelines should be reviewed against your current business activities to determine if you are required to begin collecting sales tax in additional states.

• This ruling doesn’t just impact online retailers. Any business that makes sales into a state where it doesn’t have a physical presence will be impacted. Therefore, you should plan to review your sales activities in states where you’re not currently filing sales & use tax returns. For states that have already issued minimum filing thresholds determine whether you meet these thresholds and begin readying your systems ready to start collecting sales tax.

• The Court didn’t specifically address the sufficiency of the minimum sales and transactions thresholds for the small business exclusion. Some states have already established thresholds that are much less than those set forth by South Dakota. Expect the states to push the limits by setting low thresholds.

Clearview is available to assist you with any questions regarding the Court’s ruling, how it impacts your business or the best way to prepare for the new normal of sales tax compliance.

Contact Chris at 667.207.8705 or ctracy@cviewllc.com.

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