Posted on June 21, 2018
Landmark Case Decided
On April 17, 2018, the U.S. Supreme Court heard oral arguments in the case of South Dakota v. Wayfair, Inc. et al. on the topic of nexus, physical or economic presence. Today, June 21, 2018, the U.S. Supreme Court has issued its decision in this landmark case that will revolutionize the sales tax world with its impact. The U.S. Supreme Court in a 5-4 decision issued its opinion that the decision of the South Dakota Supreme Court should be vacated and remanded thereby overturning the cornerstone Quill case which had required a seller to have physical presence in a state in order to comply with nexus requirements and sales tax registration and collection. The U.S. Supreme Court decided in the favor of South Dakota and held that Quill and National Bellas Hess be overruled thereby overturning the physical presence rule.
On March 22, 2016, South Dakota enacted legislation (S.B. 106) effective April 1, 2016 that provided for companies to collect and remit South Dakota use tax on transactions even if they had no physical presence in the state (also known as remote seller registration) and if they had in the current or prior year sales (gross revenue) of $100,000 of tangible personal property, electronic products, or services delivered into the state of South Dakota or had 200 separate transactions of tangible personal property, electronic products, or services delivered into the state. South Dakota effectively stated anyone who had sales into the state at this volume would have nexus and would have to register, collect, and remit tax to South Dakota.
On April 28, 2016, the South Dakota Department of Revenue (SDDOR) filed suit in state court against several large online retailers who did not register to collect and remit South Dakota sales tax. The retailers listed in the suit were Wayfair, Inc.; Systemax, Inc.; Newegg.com, Inc.; and Overstock.com, Inc. As a result, on May 25, 2016, the retailers filed a Notice of Removal asking the case to be transferred to federal court due to the assertion that the case questions federal law.
On July 22, 2016, the state filed a Motion to Remand asking for the case to be heard in state court not federal court due to jurisdiction. On January 17, 2017, the federal court granted the state’s remand which brought the case back to the state court.
On March 6, 2017, the South Dakota Sixth Judicial Circuit Court ruled in favor of the online retailers on the grounds of lacking physical presence in South Dakota under Quill. Furthermore, the court held that S.B. 106 failed to satisfy Quill’s physical presence requirement and failed the Commerce Clause application. In the precipice of mounting legal escalation, the South Dakota Supreme Court upheld the lower court’s decision and asserted S.B. 106 unconstitutional under Quill and stated “…Quill has not been overruled.”
On January 12, 2018, the U.S. Supreme Court granted South Dakota’s petition for a writ of certiorari. Oral arguments proceeded on April 17, 2018 at the U.S. Supreme Court in South Dakota v. Wayfair, Inc. The heart of the issue was whether the U.S. Supreme Court should repeal Quill Corp v. North Dakota’s sales tax only physical presence requirement. Much speculation has occurred in the months since the hearing over which way the U.S. Supreme Court would lean on the decision of South Dakota v. Wayfair, Inc., et al.
For the last two years, a number of states have enacted similar legislation as South Dakota and have been awaiting enforcement of such legislation pending the outcome of Wayfair. Alabama, Colorado, Indiana, Maine, Mississippi, North Dakota, Pennsylvania, Tennessee, Vermont, Washington, and Wyoming hang in the balance of the pending litigation as these states have attempted enact similar nexus laws not requiring physical presence.
Quill has been the foundation upon which remote sellers have been grounded as it requires physical presence as a factor for which states have the ability to tax sales. Quill has also been the limiter that prevents states from taxing this base of online or remote retailers. Quill was the center of attention as the U.S. Supreme Court pondered over the oral arguments before arriving at a decision in South Dakota v. Wayfair, Inc., et al.
Prior Historical Cases
Historically, the definition of nexus as defined by the courts hinges on a limited number of tax cases held by the U.S. Supreme Court. Two such U.S. Supreme Court cases are cornerstones: National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota.
In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), the U.S. Supreme Court help that the imposition of a use tax collection responsibility on mail order companies that did not have tangible (physical) presence in the state is unconstitutional.
National Bellas Hess was an out-of-state mail order company with its principal place of business in Missouri. National Bellas Hess only had a connection with Illinois (in-state) customers through common carrier or U.S. mail. National Bellas Hess had no tangible property in Illinois, had no sales outlets, representatives, or even telephone listing or advertising in Illinois. Twice a year, catalogues were sent to customers throughout the U.S. and supplemental occasional flyers were sent. All orders were mailed to the Missouri location where goods were then sent to customer by mail or common carrier.
The Illinois Supreme Court issued a judgment requiring National Bellas Hess to collect and pay the use tax imposed by Illinois consumers. The U.S. Supreme Court upon hearing the case held that the Commerce Clause prohibits a state from imposing the duty of use tax collection and payment upon a seller whose only connection with customers in the state is by common carrier or by mail.
Citing the Fourteenth Amendments’ Due Process Clause, a definite link or minimum connection is required between a state and the person, property, or transaction which the state wishes to tax. In this case, the Court found that physical presence within a state satisfies the requirement of Due Process.
The other milestone case of notoriety in the tax world is Quill Corp. v. North Dakota, 504 U.S. 298 (1992) in which the State of North Dakota argued that Quill’s (a direct marketer’s), economic presence in the state met both the Due Process Clause and the Commerce Clause requirements as they relate to nexus.
Quill Corporation was an out-of-state mail order house with neither outlets nor sales representatives in the state of North Dakota. North Dakota filed an action in state court requiring Quill to collect and pay use tax on goods purchased for use in the state of North Dakota.
Ruling in Quill’s favor, the trial court found the case indistinguishable from National Bellas Hess and held that a similar Illinois statute violated the Fourteenth Amendment’s Due Process Clause and created an unconstitutional burden on interstate commerce. The state also based its case on commercial and technological innovations which impacted the “bright-line” test of physical presence and stated Bellas Hess was therefore obsolete.
Siding with Quill, the U.S. Supreme Court reaffirmed the physical presence standard for nexus and also further distinguished the Due Process and Commerce Clause nexus standards. They overruled Bellas Hess and stated that a taxpayer’s “purposeful availment” of the marketplace satisfied the minimum contacts requirement, thus affirming economic presence. The Court also determined that the Commerce Clause still requires “substantial nexus”, in other words physical presence, that is not de minimis to avoid an “undue burden” on interstate commerce. The Court closed by calling Congress to action if it wanted a different result.
Impact of U.S. Supreme Court Decision in South Dakota v. Wayfair
The impact of the effects of Quill being overturned by the U.S. Supreme Court has great magnitude as it relates to the basis for sales tax registration, collection, and remittance as we know it today. Imagine a U.S. where all transactions may be subject to sales tax regardless of where the seller is located (or not), where online sellers will be forced to register in all taxing states and take on the compliance aspect of not only registering but also collecting tax at rates associated with all of the approximately 10,814 (as of October 2017) U.S. state and local taxing authorities and the related administration of filing returns on a monthly basis, making prepayments as required, collecting resale and exemption certificates in all states as applicable, and being subject to sales and use tax audits in potentially all 45 taxing states and 38 states with local sales taxes.
Retailers with no physical presence in a state yet sales to that state will be affected by the implication of nexus, registration, and sales tax collection. Such companies will need to complete sales tax registrations within each state as well as registration with the Secretary of State to do business in that state. These retailers will also need to purchase tax software that can help them properly charge correct tax rates in multiple jurisdictions and will need to either remit sales taxes collected to states themselves or engage a tax provider who can manage their sales tax compliance function for them. Exemption or resale certificate issuance and collection will be changed with the addition of multiple states’ certificates now being required. Sales tax audits will increase with the addition of these new taxpayers to such states.
The financial impact on retailers will be attributed to the additional expense of purchasing such services and/or products from tax providers. Future effects will be increased audit exposure for retailers and managing the sales tax audit function with various states for multiple years.
Tips for the Taxpayer
There are steps that a business can take now to review its tax situation, prepare, and ensure compliance. Listed below are ten steps to consider:
Become knowledgeable on sales tax in U.S. states and localities
Summarize your business and tax footprint (sales levels by state, physical or economic presence, state requirements)
Determine impact to your business by engaging a tax professional to consult
Enlist a tax professional to register your business in taxing states and localities
Purchase tax software or change tax flags within existing tax software
Collect and remit sales or use tax to all affected states monthly (frequency determined by the state and volume of sales)
Research/determine taxability of your products or services
Seek potential available exemptions for products or services
Document exempt or resale transactions utilizing exemption certificate management best practices
Prepare for future audits with proactive strategy and representation
Companies who sell products, services, or electronic goods in the United States will be affected by the decision of the U.S. Supreme Court today. The holding of this case will more seemingly have ramifications for all parties involved: consumer, retailer, tax professional. Stay updated with the latest legislation and related notices by monitoring state and federal legislation and cases. Understand your business’ footprint from a physical presence perspective and an economic nexus perspective. If you have nexus in a state, you must register to collect and remit sales or use tax. Not doing so can have substantial financial consequences that may affect your bottom line and will result in penalties and interest. Consult a tax professional for expertise, guidance, and execution of tasks.
With the U.S. Supreme Court decision today, there is a chance that nexus may be created for your business currently and you may be required to collect sales and use tax on sales in nonresident states.
If you are concerned that you may now have sales and use tax nexus, please contact us at email@example.com. We can help you determine if you have a sales and use tax collection requirement and limit potential penalties and interest.
Contributor: Trisha Davidson
How Can We Help?
Allyn offers tax compliance and consulting services for companies doing business in the United States. Allyn has significant tax experience assisting businesses with nexus reviews, research of taxability, registration with states at the Secretary of State and Department of Revenue levels, filing of state and local sales and use tax returns in all U.S. taxing jurisdictions for the last 26 years, sales tax audit defense, exemption certificate management, and performing opportunity reviews of sales and use tax processes. We use our vast experience to help your business improve compliance, minimize costs, reduce liabilities and increase profits.
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Contact us for help with nexus, registrations, exemption certificate management or sales tax return filing, and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: firstname.lastname@example.org.
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