As you may have heard, last week, the United States Supreme Court issued a landmark decision that will forever change internet sales. (South Dakota v. Wayfair, Case No. 17-494).
Our clients, who probably like you, offer retail sales on-line and have been receiving notices over the past few years harassing them about state sales tax collection. And for years, these thinly veiled attempts to raise state tax revenue failed because of a single U.S. Supreme Court case – Quill Corp. v. North Dakota.
South Dakota was no different. It recently enacted a law wherein a seller, who delivers more than $100,000 of goods or services into South Dakota or engages in 200 or more separate transactions for the delivery of goods and services into the state, on an annual basis, has to collect and remit sales tax “as if the seller had a physical presence in the state.”
Before last week, such a law violated the 1992 Quill decision. Under Quill, a retailer had to maintain a physical presence in a state, such as retail outlets, solicitors, or property in order to collect state sales tax. In fact, the State of South Dakota actually conceded its law violated Quill, but argued Quill was incorrect and outdated.
If you do not believe the internet has changed the fabric of retail sales, think about this – South Dakota asked the U.S. Supreme Court to review Quill “in light of the current economic realities.” With last week’s Wayfair decision, Quill’s physical presence rule no longer exists. As the court noted, “though Quill was wrong on its own terms when it was decided in 1992, since then the internet revolution has made its earlier error all that more egregious and harmful.” The Court concluded “the physical presence rule of Quill is unsound and incorrect.” While deciding to abandon the physical presence requirement, the Court noted “modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill.” The Court’s feelings about Quill spilled out when it noted “in effect, Quill has come to serve as a judicially created 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.”
Simply stated, on-line retailers must dust off their operating procedures, examine all 50 state tax codes, and start charging customers the respective state sales tax. If states do not already have a sales tax law similar to South Dakota, it could be expected that those general assemblies will cut short their summer vacations and start fast-tracking the legislation this week.