The court case, Quill Corp v. North Dakota (Quill) from 1992, that prohibited states from imposing sales tax on vendors absent a physical presence in the state is now considered “unsound and incorrect,” as declared by the United States Supreme Court on June 21, 2018. The Supreme Court ruling in the South Dakota v. Wayfair, Inc. (Wayfair) deems constitutional:
The imposition of sales tax collection obligations on out-of-state e-commerce companies and sellers using platforms such as Amazon, Inc., even when lacking a physical presence within in a state, upon meeting specific sales thresholds.
Pursuant to the Commerce Clause of the Constitution, substantial nexus is required before a state can impose the collection and remittance of sales and use tax. Under Quill, a state could only require an out-of-state seller to collect and remit sales and use tax when the seller had a physical presence within the state. The physical presence requirement was required to establish “substantial nexus” in a state. However, in recent years states have found ways to implement tax law changes which require sellers to collect and remit sales and use tax absent a physical presence in the state. As a result, establishing substantial nexus with a state is no longer black and white, but became a gray area. In many states, recent legislation has introduced economic nexus, which requires out-of-state businesses to collect and remit sales and use tax when certain economic thresholds are met.
South Dakota passed legislation that requires out-of-state sellers to collect sales tax if the retailer:
- Has annual gross revenue of more than $100,000 from sales in South Dakota; or
- Completes more than 200 sales annually in South Dakota.
The Supreme Court finding in Wayfair is not automatically deemed constitutional. The decision made clear that the Quill standard is no longer required to be a consideration when states impose sales and use taxes.
The assumption is all states will rush to rewrite legislation enacting similar tax law to increase revenues now that Quill is no longer part of any Commerce Clause test. As an example, the State of Michigan has already issued a Revenue Administrative Bulletin to discuss the incorporation of the Wayfair economic presence standard in determining nexus requirements for Michigan sales tax purposes. The new RAB requires remote sellers with $100,000 of sales in Michigan (both taxable and non-taxable) or those who have 200 separate sales transactions to start collecting Michigan sales tax effective October 1, 2018. Michigan is merely one of dozens of states readily looking to replicate South Dakota legislation.
Opportunely, there is a break in the Wayfair case opinion for foreign sellers in our global economy. The case decision does not address how states will require foreign sellers to collect sales tax on purchases made by customers in the U.S. Even though a state can issue state judgements against another jurisdiction when sales tax goes uncollected, the process does not prove successful when foreign entities are involved. As such, the expectation is that Congress will address the Wayfair ruling and implement a provision to enforce sales tax collection by foreign retailers selling into the U.S.
In summary, new legislation affecting business requirements to collect and remit sales and use tax is expected to be top priority for states across the U.S.
Whether you are actively collecting and remitting sales tax in one state or five states, contact Clayton & McKervey for assistance understanding how the Wayfair case affects your current state filings and guidance to meet your compliance needs.