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June 22, 2018

South Dakota v. Wayfair Rules Remote Sellers Obligated to Collect Tax

The Supreme Court of the United States (“SCOTUS”) has made their decision in South Dakota v. Wayfair.  As initially feared, the Court has taken the liberty to overrule Quill v. North Dakota, a case that has driven the sales and use tax world for three decades as it relates to physical nexus and out of state sellers collecting another state’s tax.

Background on South Dakota v. Wayfair

South Dakota is one of the states that enacted legislation that forces a collection requirement on a seller if their sales into South Dakota exceed $100,000 OR consist of 200 or more transactions.  This case quickly climbed the appellate ladder, if you will, to the SCOTUS.  Based on the Justices questions in the hearing, many thought that the Court would find a way not to overrule Quill.  However, that was not the case.

Leveling the Playing Field on Remote Sellers

A number of states have enacted similar laws to South Dakota, referred to by some as economic nexus laws, so this is not an issue related only to South Dakota.  More states are already following suit.  Others likely will, also.  It has long been the law that physical presence, based on National Bellas Hess and Quill, is required under the Commerce clause for a state to enforce a collection liability on the part of a Seller.  In the Wayfair decision, Justice Kennedy points out that physical presence is no longer necessary to create the “substantial nexus” requirement under Complete Auto.

The Court reasons that Quill gives remote sellers a competitive advantage, as they can avoid charging tax, and the purchaser does not pay tax on the transaction, unless they voluntarily accrue use tax.  If the purchaser acquired their goods from a local vendor, that vendor is obligated to charge tax.  Though the purchaser is obligated to pay consumer’s use tax on taxable transactions from out of state, many, or virtually all, purchasers fail to do just that.  Hence, the competitive advantage for remote sellers.  Justice Kennedy states in the Court’s opinion, “The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders.  Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedence [in Quill].”  He continues, “It is unfair and unjust to those competitors, both local and out of State, who must remit the tax; to the consumers who pay the tax; and to the States that seek fair enforcement of the sales tax…”

Pursuant to the Court, Wayfair advertises that “’[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.’”  The Court stated that this “subtle offer to assist in tax evasion” assumes solvent state and local governments.  State governments are losing billions of dollars of tax revenue on taxable transactions.  The Court articulated further that these state taxes fund the maintenance of the roads and municipal services that give remote sellers access to customers, as well as banking institutions, and courts to ensure collection of the purchase price.

How Businesses Will Be Impacted

The Court’s decision will likely impact your business now or in the future, especially if you operate an online platform in a multistate environment.  It will be important to track your sales in many states to be sure you do not create nexus by reaching the thresholds the state has determined by legislation.  Our State and Local Tax advisors are ready and available to help you remain compliant in all jurisdictions in which you are obligated to collect and remit the tax.  Contact an Anders advisor with questions specific to your business.

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