The United States Supreme Court abandoned its longstanding physical presence nexus standard for sales/use tax collection previously decided in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bella Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) with a decision announced last week in South Dakota v. Wayfair, Inc. et al. Following South Dakota v. Wayfair, remote sellers with no physical presence in a state, but with substantial virtual and economic presence, can be compelled to collect sales/use tax without violating the commerce clause.
Previously under Supreme Court rulings, a seller could not constitutionally be required to collect sales/use tax in a state if the seller did not have a physical presence in the state. Despite this, South Dakota, enacted legislation requiring out-of-state sellers to collect sales tax on goods shipped to South Dakota if the seller sold $100,000 or more of goods or services into South Dakota or 200 or more separate transactions for the delivery of goods and services into South Dakota on an annual basis. The Supreme Court found “this quantity of business could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.” The Supreme Court found that previous Supreme Court precedent “does not align analytically” with “modern e-commerce.” Quill’s requirement of a physical presence nexus gives an “arbitrary advantage [to remote sellers that do not collect tax] over their competitors who collect state sales taxes.” It also created a disincentive to expand physical operations into new states as that would create a nexus. The Supreme Court noted, “[i]n effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers – something that has become easier and more prevalent as technology has advanced.”
The South Dakota tax system has three features: South Dakota has adopted the Streamlined Sales and Use Tax Agreement (SSUTA), meaning that South Dakota uses standardized definitions of products and services and also provides sellers access to software paid for by South Dakota; South Dakota’s economic nexus rule is prospective only; and South Dakota has a small seller exception.
This could lead to future litigation in this area if state sales/use tax economic nexus statutes do not have these same features. The Supreme Court also acknowledged the likelihood of a challenge that a state’s economic nexus sales/use tax statute, while constitutional, could operate in an unconstitutional way, burdening interstate commerce, as applied to the business’s specific and individual facts. The Supreme Court also did not provide any guidelines on how much economic nexus might be satisfactory in other states or if the South Dakota thresholds are constitutionally sufficient for every state.
While there are still issues to be settled, states now can compel large, national retailers to collect sales/use tax, even if these large, national relaters lack a physical presence in the state. This decision bodes well for public schools, which receive funding through sales tax in many states.