So, what’s new in state sales tax?  As of 6/21/18 – EVERYTHING!!

In a  highly anticipated ruling, the U.S. Supreme Court ruled 5-4 in favor of overturning its 1992 decision in Quill, which set a standard requiring substantial physical presence before a state could enforce the sales tax collection responsibilities on a seller.  In today’s case, South Dakota v. Wayfair, Inc., writing for the Court’s majority, Justice Anthony Kennedy indicated “…the Court concludes that the physical presence rule of Quill is unsound and incorrect.  The Court’s decision in Quill Corp v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), should be, and now are, overruled.”

What does this mean?  The short answer is that companies will now need to consider not only whether they have physical presence (or “boots on the ground”) nexus in a given state, but also whether their sales activity in a state exceeds certain “economic nexus” thresholds (such as the South Dakota threshold of $100,000 of sales or 200 annual transactions).  If so, they will need to register with the state and collect and remit sales taxes.  Note that the ruling only addresses the South Dakota legislation, which also was not retroactive.

However, we can likely infer that the Court believes that the thresholds set by South Dakota are “substantial nexus” as required by another famous US Supreme Court state tax case in Complete Auto Transit, and that similar legislation passed by other states will also be held to be Constitutional.  And many states have similar statutes ready to go.  In short, if you’ve been putting off that nexus study…it’s time to revisit it.  Also note that while this case related to online retailers, the ruling is not limited to e-tailers.  This ruling impacts anyone selling into the state.  For those of you wondering if you need to start filing today, the practical answer is probably not today.  But very soon.

The longer answer is that much still remains to be seen.  Will other states pass economic nexus statutes similar to South Dakota’s?  Likely!  But what if the thresholds are lower?  Will they still be constitutional based on today’s decision?  Will Congress continue to consider legislation that could raise the threshold to $1 Million (or more) before creation of nexus, like the various Marketplace Fairness Act bills have proposed for years?  Will Congress consider a bill that would codify Quill via the No Regulation with Representation proposed legislation?   (See our blog https://www.milesconsultinggroup.com/blog/2017/08/30/new-online-sales-tax-legislation-why-is-it-interesting/ )

Dissent:  In his dissenting opinion to today’s ruling, Chief Justice Roberts indicated “The Court…breezily disregards the costs that its decision will impose on retailers.  Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers.”  He added “The burden will fall disproportionately on small businesses.”   And that’s where we shake out.  Most of our clients fall into the category where the ruling will prove to be burdensome in terms of complexity, compliance and cost.

Have a tax question? Contact Monika Miles.