U.S. Supreme Court
Shakes-Up Nexus World
Physical Presence No Longer Required
Sales Tax Impact is Far Reaching
The U.S. Supreme Court’s decision in South Dakota v. Wayfair on June 21, 2018 was a landmark case that likely will have very significant tax consequences affecting both business owners and consumers. By way of background, in 1992, the Supreme Court barred North Dakota (Quill Corp. v. N. Dakota) from requiring an out-of-state mail-order company to collect use tax on goods sold to N. Dakota customers. The company solicited business in N. Dakota using catalogs and flyers, advertisements, and telephone calls. The Court reasoned that, under the dormant Commerce Clause, the company could not be liable for N. Dakota sales tax because it had no outlets, sales representatives (employees or other agents), or significant property (owned or leased) in N. Dakota. The Supreme Court upheld the physical presence requirement for sales tax nexus. A business may be constitutionally subject to due process in a state, but that does not mean it also necessarily has the presence required to create nexus as required by the Commerce Clause for the state to impose tax on it.
Why Did South Dakota Pursue Wayfair?
South Dakota does not have an income tax. Thus, it relies on sales taxes for funding. From the state’s perspective, it loses massive tax revenue to internet retailers that don’t collect S. Dakota sales tax. While S. Dakota residents who made taxable purchases on the internet are subject to S. Dakota’s use tax (a complementary tax imposed by states that have a sales tax), many taxpayers are unaware that this use tax exists or simply choose to ignore it.
Let’s look at an example as to how the use tax works. Assume a resident of PA purchases $500 of jewelry on the internet or in DE (a state that does not impose a sales tax). The resident is required by law to remit $30 (the PA sales rate is 6%) to the PA DOR as a use tax. The PA-40 tax return has on page 2 a section where the taxpayer computes the use tax due PA and remits it along with any income tax due. If a taxpayer fails to report the use tax due, states such as S. Dakota, are losing tax revenues.
Accordingly, it passed legislation that requires out-of-state retailers to collect South Dakota sales tax if the retailer:
- had annual gross revenue of more than $100,000 from sales in South Dakota; or
- completed more than 200 sales annually in South Dakota.
South Dakota included an appeals process in the legislation that would expedite any taxpayer challenges to it.
Supreme Court Overturns Quill
After the law was enacted, S. Dakota sent notices to several companies about the new law and advised the companies to register to collect S. Dakota sales tax. When the sellers did not register, the state sought a declaratory judgment against them. Eventually, the case was heard in a S. Dakota circuit court. The district court found in favor of the sellers, and the S. Dakota Supreme Court affirmed, following Quill. Hence, S. Dakota appealed to the U.S. Supreme Court [Read more…] about U.S. Supreme Court Shakes-Up Nexus World of Taxation
