SCOTUS' Game-Changing Sales Tax Decision

By Scott A. Dondershine, CPA, Esq.

June 2018

A recent decision by the US Supreme Court (SCOTUS, for short) may cause on-line internet retailers to shorten the summer vacations of their accounting and finance staff. On June 21, 2018, SCOTUS, in a case that is a sure bet to make the SCOTUS state tax law Hall of Fame (South Dakota v. Wayfair, Inc., 585 U.S. ____ (2018)), redefined the "substantial nexus" test in a way that will force more internet retailers to begin collecting sales taxes.

Prior to the ruling, SCOTUS had held that an out-of-state seller's liability to collect sales tax on sales into a particular state applied if the seller had a "physical presence" in that state. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Simply shipping goods into a particular state using a common carrier, e.g., Federal Express or USPS, did not satisfy the requirement. Something more was required, i.e., having one or more employees located in the subject state, owning/leasing realty in such state or delivering goods/services in the state using the seller's own trucks.

In the South Dakota case, SCOTUS considered the constitutionality of a new law that tried to expand the "physical presence" test. The law determined that out-of-state sellers are "deemed" to have a "physical presence" by simply delivering more than $100,000 per year of goods or services in South Dakota, or engaging in 200 or more separate annual transactions for the delivery of goods or services in South Dakota. The Supreme Court of South Dakota invalidated the law correctly noting that it failed the traditional physical presence test by forcing sellers with no employees or real estate located in South Dakota to collect South Dakota sales taxes.

SCOTUS pointed out that the economy has changed since 1992 when it adopted the holding in the Quill case and that the Quill case is now outdated. A physical presence is therefore no longer required to establish a substantial nexus, and the South Dakota law is valid.

Impact of Ruling: As a result of the ruling, many online retailers that previously avoided collecting sales taxes for sales into a state in which they had no physical presence will now have to rethink their policies. State legislatures are likely to begin working immediately to adopt policies similar to South Dakota. We anticipate a flood of new laws that will redefine substantial nexus by linking it to the volume of sales into a particular state (new law), as opposed to having a physical presence (old law). It should be a busy year in the state capitals and court systems as the new paradigm is tested and new boundaries are established.

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