On June 21, 2018, the U.S. Supreme Court issued a pivotal decision in South Dakota v. Wayfair, Inc., overturning the physical presence standard previously established in Quill Corp. v. North Dakota (1992). This requirement prevented state and local taxing authorities from imposing sales tax collection requirements on out-of-state sellers who did not have physical presence in their jurisdictions. Due to the exponential growth of internet commerce, the states have lost a significant amount of tax revenue, as their residents chose to purchase products from out-of-state sellers who were not required to collect tax on their sales, rather than in-state retailers. To combat this issue, South Dakota passed legislation in 2016 requiring out-of-state sellers who engaged in more than 200 or more separate transactions or exceeded $100,000 of annual sales in the state, to register and collect tax. The intent of this legislation was to bring a challenge to Quill’s physical presence standard at the Supreme Court. A number of other states have passed similar legislation in the past two years as well.
In its decision, the Court held that the physical presence standard established in Quill is “unsound and incorrect.” The majority opinion (5-4) authored by Justice Anthony Kennedy states that Quill is flawed on its own terms, and that the physical presence rule is not a necessary interpretation of the requirement that a state tax must be applied to an activity with substantial nexus with the taxing state. The opinion furthers states that Quill creates, rather than resolves, market distortions; and it imposes the sort of arbitrary, formalistic distinction the Court’s modern Commerce Clause precedents disavows.
This decision does immediately open the door for states to start imposing sales tax collection requirements on out-of-state sellers, as the Court remanded the case to the South Dakota Supreme Court to decide whether any other principles of Commerce Clause doctrine may render the State law unconstitutional. However, the majority opinion noted that South Dakota’s law included several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce; therefore, it is unlikely any further challenges may be raised.
Stay tuned to Tronconi Segarra & Associates for more information on how this decision changes the landscape of sales tax collection, and how it potentially impacts your business’ sales tax filing requirements across the United States.