On June 21, 2018, the Supreme Court of the United States (SCOTUS) issued a landmark ruling in South Dakota v. Wayfair. The case involved whether or not it was constitutional for a state to require an online retailer to collect sales tax on internet sales when there was no physical presence. The Wayfair decision overturned previous rulings by SCOTUS in National Bellas Hess v. Department of Revenue of Illinois (1967) and Quill Corp v. North Dakota (1992), where it was determined that a company must have a physical presence in a state in order for that state to lawfully require the collection and payment of sales tax.
Under the Wayfair ruling, SCOTUS appears to support South Dakota’s statutes allowing for economic nexus with no physical presence, and that Wayfair, an online retailer, must collect and remit sales and use tax on its internet sales of tangible personal property to customers in South Dakota. The 5-4 decision was far from a landslide and appears to have created just as many questions as it did answers.
A Closer Look at the Ruling
On the surface, one could assume that this decision can be applied to any state looking to implement an economic nexus standard. In reality, this case is not that cut and dry. The ruling only validates the South Dakota statutes and would only apply to other states under similar circumstances.
In this decision, SCOTUS listed several characteristics of the South Dakota law that influenced its decision. South Dakota’s law only required the collection of sales tax for retailers who had sales in excess of $100,000 or total transactions in excess of 200. In addition, South Dakota is one of more than 20 states that have adopted the Streamlined Sales and Use Tax Agreement. This agreement helps to standardize taxes and creates uniform definitions, simplified tax structures, and other uniform rules across the member states. These characteristics were sufficient enough in the Court’s eyes to deem the law constitutional.
Again, the ruling does not mean that all states may now enforce economic nexus rules. The Court’s decision was made with respect to the laws of South Dakota and the unique language included in those laws. Other states may not have the statutory language necessary to enforce an economic nexus rule. However, those states now have a roadmap and will likely use South Dakota’s laws as a foundation for their own.
By overturning the physical presence test, SCOTUS has opened up the door for all states to implement economic nexus legislation. Several states, such as Rhode Island and Utah, already have the necessary language in their statutes to immediately begin to enforce economic nexus on taxpayers. In these two cases, the language even specifically references the outcome of the Wayfair case. Most states that do not have economic nexus statutes will likely introduce legislation to take advantage of the Wayfair ruling in the near future.
Obviously, the ruling will have an immediate impact on online retailers or any companies conducting online sales across state lines. While one would think that large retailers like Amazon would be hurt the most, it appears that smaller online retailers may be the most adversely affected. Amazon has been collecting sales tax on a large percentage of sales for a number of years now. The online retail giant knew that this day was coming and worked with several states to lay the groundwork for the transition. Amazon could even begin charging online sellers who use Amazon’s website a fee in order to collect the tax for them. In all likelihood, Amazon will turn this into an opportunity.
Smaller retailers, however, will not be so fortunate. Many of these companies will not have the knowledge or the resources to accurately collect taxes on all of their multi-state sales. They will be forced to allocate additional resources in order to comply with state sales tax laws. One thing that smaller businesses do have going for them is the fact that the Court specifically cited the minimum sales thresholds as a reason for their decision. I expect that any new legislation will have similar language that will exclude a large number of smaller online retailers.
Anticipating the Future
The fallout from this ruling will have far-reaching effects. I expect most states that do not already have economic nexus language in their statutes to put forward legislation within the next year to take advantage of the ruling. This will have a snowball effect among the states.
Additionally, the impact of the ruling could have effects that bleed over into other tax types. While this ruling deals specifically with sales tax, states could push the envelope and drop physical presence nexus standards for income tax as well. Quill has already been cited in several income tax court cases in the past, so there is no reason to believe that Wayfair will not be cited in future cases as well. We could see new income tax legislation coming out of the states in the very near future.
While the immediate impact may seem obvious, the long-term impact remains to be seen. One-by-one, states are issuing statements on how they will treat online retailers. Others are quietly reworking their statutes behind the scenes. Even the federal government could get involved and enact legislation. It will be interesting to see just how far-reaching this landmark decision will be, but there is no doubt that the impact will be great.
Businesses can get ahead of the situation with proper planning and advice. Those that operate as online retailers will have the most exposure and should consult with a CPA firm that has expertise in complex state and local tax (SALT) matters such as HORNE. The impact, however, will not be limited to online retailers. All types of businesses will benefit from a SALT consultation because the impact of the new standards will extend beyond e-commerce. Relevant tax services, such as taxability matrices and nexus studies, can assist a business in this transition and help to minimize potentially substantial exposure to tax, interest, and penalty assessments. Consult with your tax partner to help you navigate this changing environment.
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