Supreme Court Overturns Quill: E-Commerce and Other Remote Sales Businesses May Now Be Required to Collect and Remit Sales Tax In Every State
On Thursday, June 21, 2018, The United States Supreme Court ruled that a state may require out-of-state sellers to collect sales tax, even when the sellers have no physical presence in the state. This decision, overturning long-standing precedent, could significantly increase tax compliance costs for e-commerce vendors and other remote sellers.
The decision and the implications
In South Dakota v. Wayfair, Inc. et al, No. 17-494 (2018) (“Wayfair”), the Supreme Court held that a seller can be taxed by a state based on “economic nexus” – i.e. by selling to customers in that state. While the Supreme Court did not establish a minimum standard of “economic nexus,” it held that South Dakota’s standard, $100,000 in annual sales or 200 or more transactions with customers in the state, was sufficient.
Although the $100,000 annual sales threshold is high, the 200 or more transactions threshold is quite low and will force many smaller e-commerce businesses to incur additional compliance costs. In most states, sales taxes are trust fund taxes, meaning that both the seller and the responsible officers and owners of the seller can be held liable for failure to collect the tax. We can expect to see many states adopt statutes similar to South Dakota’s; in fact, many states already have, although the economic thresholds vary. A number of states that had adopted statutes requiring reporting by out-of-state vendors are likely to modify those statutes to require actual collection of tax. We can expect to see further litigation over which threshold amounts, in both dollars and transactions, will qualify as substantial nexus under the Commerce Clause. While the South Dakota statute by its terms did not apply retroactively, we can also expect states to attempt to collect sales tax from remote sellers for transactions prior to the date of the Wayfair decision.
Beyond this, there are over 10,000 states and localities that impose sales taxes, at many different rates, many with different exemptions for goods and services. Unless Congress imposes a uniform standard, remote sales businesses will have to determine whether the goods and services they provide are subject to or exempt from sales tax in each of these jurisdictions.
Most importantly, any remote sales businesses, whether online or not, should speak to their tax advisors about whether they meet the sales tax collection standards in various states, how to come into compliance, and how to adapt their online sales platforms to account for these laws going forward. As a practical matter, it may be simplest to collect sales tax for any state that has a remote seller statute, rather than wait to meet the minimum threshold and risk inadvertent noncompliance.
The Supreme Court twice before ruled, on Due Process and Commerce Clause grounds, that states were prohibited from collecting sales tax from businesses that did not have physical presence in a state, either through owning property or having employees in that state. National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) (“Bellas Hess”); and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (“Quill”). This standard arose prior to the emergence of the e-commerce business, but nevertheless provided an apparent advantage to out-of-state e-commerce businesses over traditional in-state brick and mortar stores because e-commerce businesses were not required to collect sales tax (creating an apparently lower price to the consumer). Although a purchaser of goods from an e-commerce vendor that does not collect sales tax is required to pay use tax, in many cases the purchasers fail to pay use tax – often because they are not aware of their use tax obligations. As a result, states believed that their sales tax revenues decreased by billions of dollars in the aggregate, without comparable increases in use tax revenues, largely due to consumers’ noncompliance with use tax laws. In response, states began to draft legislation requiring online sellers doing more than a threshold amount of sales or transactions to customers in a state to collect and remit sales tax on such sales.
South Dakota drafted a statute that required remote sellers doing more than $100,000 of sales or 200 or more transactions in a given year to collect sales tax. The statute was specifically designed to directly conflict with the Bellas Hess and Quill decisions and to bring the issue to the United States Supreme Court to address. Wayfair, an online home goods business, challenged the constitutionality of South Dakota’s statute, and the Supreme Court ruled against Wayfair.
The Wayfair decision overturns decades of precedent, but is not surprising. Forty-one states, two territories, and the District of Columbia petitioned for the Supreme Court to overturn Quill and Bellas Hess. The majority in Wayfair spends significant time discussing the evolving marketplace and the inadequacy of a physical presence standard in the modern economy. The decision holds that the physical presence rule of Quill is unsound and incorrect, and that the Supreme Court’s decisions in Quill and Bellas Hess are overruled. With these rulings overturned, the Supreme Court concludes that the South Dakota statute, imposing sales tax collection responsibilities on a seller with $100,000 or more of sales or 200 or more transactions in a given year in South Dakota, meets the substantial nexus requirement of the Supreme Court’s existing Commerce Clause jurisprudence.
Please contact us if you have questions about how the Wayfair decision might affect your business and what steps you should take to address this major change in law.