Today, the Supreme Court ruled in favor of a South Dakota law that requires remote sellers to collect and remit sales tax if they have over $100,000 of sales to, or engage in 200 or more transactions with, South Dakota customers. This applies even if the remote seller has no physical presence in the state. The holding in the case overturns the “physical presence” standard, which the Supreme Court adopted 26 years ago in its Quill v. North Dakota ruling.
In a 5-4 decision, Justice Kennedy, writing for the majority, reasoned that with every passing year the “physical presence rule becomes further removed from economic reality.” This results in significant losses to the states. Kennedy was joined by Justices Alito, Gorsuch, Ginsburg and Thomas in finding that Quill “imposes the sort of arbitrary, formalistic, distinction that the Court’s modern Commerce Clause precedents disavow.”
Justice Kennedy further stated that the ruling in Quill created a competitive disadvantage for local and interstate businesses. Moreover, the opinion rejects the idea that a single employee should be able to create physical nexus as mandated in Quill, but that “physical aspects of a pervasive modern technology should not.”
What does the decision mean?
E-commerce companies and sellers using platforms like Amazon.com must now comply with South Dakota’s law, if they meet certain state’s sales thresholds. This applies even though they do not have a physical presence in the state.
It is expected that virtually all other states that administer a sales tax will copy South Dakota’s law now that the Court has upheld its constitutionality.
What is the fallout from the decision?
One issue that arises from this ruling is that the sales tax compliance burden on small e-commerce businesses will grow tremendously. Such businesses may also become targets of state sales tax audits even though no employee, property or owner of the company is located in the remote state. As a result, marketplace providers such as Amazon.com become a more important component to enable smaller third-party sellers to comply with the law.
What should you do now?
In light of this ruling, remote retailers are encouraged to discuss and review the answers to the following important questions in preparation for abiding by South Dakota’s law:
- How much are your sales in each state?
- How many sales transactions do you have in each state?
- What products and/or services do you sell?
- Where do you currently collect sales tax?
The Supreme Court’s decision in South Dakota v. Wayfair provides some much needed clarity with respect to remote sellers and their state sales tax obligations. While some issues remain unresolved, retailers and their advisors now have knowledge of any potential state sales tax compliance and exposure when engaging in business in a new state. Given the likelihood that all of the states that impose sales tax will now adopt legislation similar to South Dakota’s law in their efforts to target remote sellers, businesses would be well advised to focus on their potential sales tax obligations.
If you require assistance with respect to assessing sales tax reporting responsibilities, please contact:
Principal, Director of State and Local Taxation
Principal State and Local Taxation and Tax Controversy