Supreme Court Rules States Can Now Tax Online Sales Made by Remote Sellers
The Court’s decision in South Dakota v. Wayfair overturned the longstanding physical presence test last visited in Quill v. North Dakota in 1992, which required that the seller have a “brick and mortar” presence, have employees in the state, or other similar markers of a physical presence. In the absence of a physical presence, states had to rely on residents to self-report and pay use tax on purchases from out-of-state sellers.
Writing for the Court, Justice Kennedy declared the decision in Quill to be “unsound and incorrect” and called the physical presence test 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.”
The actual effect of the decision will unfold over the course of the next year as state legislatures quickly move to pass legislation to come up to speed with this decision. The Court did not establish guideposts for states to follow when creating new legislation. However, the Court did note that a seller must still have a substantial nexus with a state before that state can require a seller to collect sales tax. Justice Kennedy noted that South Dakota’s law does not require a seller to collect sales tax unless the seller “deliver[s] more than $100,000 of good or services into South Dakota or engage[s] in 200 or more separate transactions for the delivery of goods and services in the State on an annual basis.” He noted that this threshold requirement “affords small merchants a reasonable degree of protection.”
For now, we can expect that states that seek to require remote sellers to collect and remit sales tax will provide some threshold that must be exceeded before the requirement will apply. Moreover, other than a few states that have already jumped on South Dakota’s bandwagon, many states will need to update their statutes to create the legislative authority to require remote sellers to collect sales tax. Other than South Dakota, it appears that Alabama, Indiana, Maine, North Dakota, Vermont, and Wyoming have enacted statutes that will have force following the Court’s new decision in Wayfair.
Although the South Dakota law bars retroactive assessments of uncollected sales tax, some of the similar laws in other states do not.
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