U.S. Supreme Court Decision – South Dakota v. Wayfair, Inc. et al
Paul E. Valencic, CPA
June 22, 2018
On June 21, 2018, the U.S. Supreme Court (SCOTUS), in a 5-4 decision, ruled that the physical presence standard established in Quill v. North Dakota (1992) was “unsound and incorrect”, citing the current standard is antiquated and isn’t appropriate in today’s e-commerce economy. Prior to the South Dakota v. Wayfair decision, Quill required that remote sellers needed to have a physical presence in the state in order for them to be required to collect sales tax. Wayfair.com, which did not have a physical presence in South Dakota, argued (under Quill) that it should not be obligated to collect sales tax in South Dakota based on the state’s economic nexus standard, which requires remote sellers to collect sales tax if taxable sales or services in the state exceeded $100,000 in 200 or more transactions. SCOTUS disagreed, and ruled in favor of South Dakota.
Not only is this a big win for states that already have economic nexus standards in place, but it’s also a big win for the brick-and-mortar retailers. Many states have lost billions of revenue dollars in uncollected sales taxes based on physical presence nexus standards, and also on the failure of purchasers to pay the complementary use tax on purchases which sales taxes were unpaid. Brick-and mortar retailers were at a competitive disadvantage with their e-commerce counterparts, as they are required to collect sales tax due to physical presence standards, something their e-commerce counterparts were able to avoid. The Wayfair decision essentially levels the sales tax playing field.
It’s safe to assume that more states will enact economic nexus legislation based on the Wayfair decision. As with Quill, which used the dormant commerce clause to restrict state taxation of interstate commerce, state lawmakers across the county will need to create some form of economic nexus standards that prevent discrimination or undue hardships for remote sellers.
Expect more developments to occur within the upcoming months. For now, it’s important to analyze potential sales tax exposure for states which already have economic nexus standards in place.
Feel free to reach out to Paul Valencic or your Maloney + Novotny LLC representative with any questions or concerns regarding sales tax collection for online sales.