On June 21, 2018, the U.S. Supreme Court issued its 5-4 decision in South Dakota v. Wayfair, Inc., making physical presence no longer necessary for online retailers to be responsible for collecting and remitting sales tax on their taxable sales. In reviewing the constitutionality of law recently enacted by the South Dakota legislature, the opinion overturned more than 50 years of precedent from the Court’s prior decisions in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967). These cases essentially required physical presence in a state through property, employees, or other activities before a state could impose sales tax collection responsibilities on out-of-state businesses.
WHAT DID SOUTH DAKOTA’S NEW LAW DO?
Retailers in South Dakota were generally responsible for collecting and remitting sales tax on the sale of goods and services in South Dakota; however, South Dakota’s new law removed the physical presence requirement.
Now, out-of-state online sellers of goods or services in the state totaling more than $100,000 in sales or 200 separate transactions each year must collect and remit sales tax “as if they had physical presence in the state” – an economic nexus standard.
WHY DID THE U.S. SUPREME COURT UPHOLD THIS LAW AS CONSTITUTIONAL?
The U.S. Supreme Court reasoned that the physical presence requirement was flawed and no longer aligned with our modern e-commerce economy. The Court even went so far as to call this requirement a “judicially created tax shelter.” Moreover, requiring physical presence had created unfair competition between retailers, putting smaller, local brick-and-mortar retailers at a disadvantage to larger, out-of-state retailers who are able to transact across the country online while limiting their physical presence to only a couple of states.
The Court considered the dormant commerce clause and evaluated whether South Dakota’s law discriminated against or posed an undue burden on interstate commerce. The Court held that South Dakota’s law did neither for three primary reasons. First, the law includes constraints in application to retailers with limited business in South Dakota. Second, sales tax obligations were not imposed retroactively. Finally, South Dakota follows the national streamlined sales and use tax agreement, which sets forth standardized rules and taxes, and even provides retailers with software to enable compliance with remitting sales tax. Iowa’s recent sales tax reform is quite similar to South Dakota’s new law.
WHAT SHOULD YOU BE CONSIDERING? BROWNWINICK CAN HELP.
Even if you don’t do business in South Dakota, many other states have or are in the process of implementing online sales tax laws similar to South Dakota and Iowa. For example, North Dakota announced it is in the process of implementing new sales tax laws similar to South Dakota, and Minnesota intends to release guidance in the next 30 days. In any event, Congress could also step in and pass a national standard with respect to who must collect and remit state sales tax.
- Sellers should be evaluating to which states they sell and determining whether they have sales tax collection responsibilities in those states and also whether their sales are subject to, or exempt from, sales tax in those states.
- Consumers or buyers of taxable goods or services from out-of-state businesses may start seeing sales tax included on their online purchases from those sellers; however, you should ensure there is no exemption to any such sales tax collection based on, for example, what you are buying or for what purpose you are using the product or service. States commonly exempt certain sales of products for resale or when used in the manufacturing process or medical industry. Note that to the extent sales tax is not included on taxable sales, you should consider filing use tax returns when necessary.
- Although the South Dakota law was upheld in part because it did not apply retroactively, it is possible other states may attempt to implement retroactive application. States will hopefully begin making announcements soon, providing guidance on how they intend to apply their sales tax laws in light of the Wayfair decision.
Should you have questions about the effect of the U.S. Supreme Court’s decision in Wayfair on your business and how you may be able to plan or restructure to minimize the impact, please contact your BrownWinick attorney or one of our tax attorneys, as listed below:
Christopher Nuss / Email: firstname.lastname@example.org
Maggie Simonson / Email: email@example.com