South Dakota v. Wayfair - Opening the Door for Imposition of State Sales' Tax on Interstate Sales
On June 21, 2018, the U.S. Supreme Court in South Dakota v. Wayfair, Inc., upheld a South Dakota statute requiring out-of-state sellers of goods to collect and remit sales tax if they have significant business in South Dakota, thus rejecting the long-standing physical presence requirement that prohibited many states from collecting sales taxes on goods sold to residents of their states. South Dakota v. Wayfair, Inc., 201 L. Ed. 2d 403 (2018). Forty-one states, two U.S. Territories and the District of Columbia asked the Supreme Court to uphold the South Dakota statute, which suggests that several other states may enact similar statutes in the future or move to enforce existing ones.
The decision overruled Quill Corp. v. N.D., 504 U.S. 298 (1992) and Nat’l Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967), which held that a state cannot require an out-of-state seller with no physical presence in the state to collect and remit sales tax on goods the seller ships to state residents.
Today, 41 states assess tax to sales within the state. Those states also have a use tax, which require purchasers who didn’t pay sales tax to a retailer to pay use tax on the goods. Collecting and enforcing the use tax has been a challenge for states.
Justice Kennedy stated in the Wayfair opinion that Quill’s physical presence rule “becomes further removed from economic reality” each year and results in significant losses to states. 201 L. Ed. at 418. The opinion noted that previous rulings put both local businesses and many interstate businesses with physical presence in the state at a competitive disadvantage, creating tax shelters for internet businesses with limited physical presence. Id. at 420. The Government Accountability Office (GAO) estimates that between $8 and 13 billion dollars of sales tax is not collected in internet sales today. U.S. Government Accountability Office, SALES TAXES: States Could Gain Revenue from Expanded Authority, but Businesses Are Likely to Experience Compliance Costs, GAO-18-114 (2017).
The Wayfair case looked specifically at the South Dakota statute that protects small merchants who do not do a considerable amount of business in the state. Id. at 414. Specifically, the South Dakota statute only applies to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the state on an annual basis. Id.; S. 106, 2016 Leg. Assembly, 91st Sess. (S. D. 2016) (S. B. 106). The statute was applied only retroactively and South Dakota is one of approximately 20 states that have adopted the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs and offers sellers free access to sales tax administration software. Id. at 427. States that introduce sales tax schemes that do not have similar protections may face legal challenge.
Sellers who might now be impacted by the South Dakota and other state statutes that require the collection of sales tax will have additional reporting requirements and costs to implement a system of collection.
Several bills were pending in Congress to address the internet sales tax issue at the time the Wayfair case was decided. Id. at 430 (Dissent). Two of those bills, Remote Transactions Parity Act and Marketplace Fairness Act address the steps states have to take to require collection and remittance of tax on interstate sales. Id. See also Marketplace Fairness Act of 2017, S. 976, 115th Cong., 1st Sess. (2017); Remote Transactions Parity Act of 2017, H. R. 2193, 115th Cong., 1st Sess. (2017). Time will tell whether Congress will seek to address inconsistent statutes that may be unleashed by Wayfair.