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U.S. Supreme Court to Consider Online Sales Tax; More Info on 529 Account Changes

Below, we look at an upcoming U.S. Supreme Court case that could change the rules governing the taxability of online and mail-order sales, and provide additional information about the change to Section 529 College Savings Account plans.


U.S. Supreme Court to Hear Case on Online Sales Tax

On Friday, January 12, 2018, the U.S. Supreme Court agreed to hear the appeal of a South Dakota case (South Dakota v. Wayfair, Inc. et. al., S.D. S. Ct., 2017 SD 56 (2017)) that challenges the physical presence test that currently governs the obligation of an out-of-state online retailer to collect sales or use tax on behalf of the states into which it makes sales. This case will be of particular interest to organizations that conduct sales over the Internet or by mail order.

In a previous opinion issued in 1992 (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)), the U.S. Supreme Court held that an out-of-state vendor must have a substantial nexus with a state before the state can require the out-of-state vendor to collect sales or use tax on sales made into the state. The Court established that the out-of-state vendor must have a physical presence within the state before sufficient nexus exists to permit the state to compel the collection of sales or use tax.

Since 1992, Internet sales have developed into a significant avenue for out-of-state sales. (Prior to 1992, mail-order catalog sales were the focus of this area of law.) As states have seen sales tax revenues decline, the issue has become a matter of significant importance to the states. In response, South Dakota adopted a statute that requires out-of-state retailers to collect sales tax on sales to South Dakota residents if the retailer’s gross revenue from taxable sales delivered in South Dakota exceeds $100,000, or if the seller makes more than 200 deliveries of these sales in South Dakota annually. The South Dakota Supreme Court ruled that the statute violates the U.S. Supreme Court’s holding in Quill, thus setting up this appeal.

Looking Ahead
The Court could rule on this case as early as this summer or defer the ruling until it returns in session after October 1. If the Court rules in favor of South Dakota, expect other states to quickly adopt statutes that mimic the South Dakota statute. However, depending on the Court’s ruling the dollar/transaction thresholds may be higher or lower than the South Dakota thresholds.

It is also likely that the Court will augment the current physical presence test rather than abandon it altogether. Thus it is unlikely that the sales or use tax collection obligations will shrink. Rather it is more likely that the obligation to collect sales or use tax will either remain the same or increase.

What You Should Do Now
Until the Court rules, there has been no change in the law. But if you are an organization that makes sales to other states, you should review the volume of sales you make to each state to be prepared to act if the Court rules in South Dakota’s favor. If you have not already reviewed your obligations under current law, this would be a good time to also confirm you are in compliance with current law.


Section 529 Accounts Are Now Available for Private School Tuition – Part Two

As we previously reported, under the new tax law Section 529 College Savings Account plans are now available for elementary and secondary school tuition. In Part Two, we explain what that means at the state level. Read more.

Please contact us with questions about these or other nonprofit tax issues. We’re here to help you navigate the many developments and considerations.

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