On Thursday, June 21, the Supreme Court held that states now can require online and other out-of-state retailers to collect and remit sales tax on sales into the state, even if the sellers do not have a physical presence in the state. The Court’s decision in South Dakota v. Wayfair, Inc., No. 17-494, reversed decades of precedent that held that a physical presence, such as an office or warehouse, was necessary to establish the constitutionally required “substantial nexus” between a tax and the activity being taxed. The Wayfair decision; however, recognized that the physical presence rule was “unsound and incorrect” and no longer reflected economic reality given the rise of e-commerce.
The milestone decision will undoubtedly have a significant impact in the marketplace. By some estimates, states are likely to collect billions of dollars each year in additional tax revenue. Nevertheless, it is unclear how far states will go in utilizing their newfound taxing power.
In Wayfair, the Court specifically analyzed a 2016 South Dakota law requiring out-of-state sellers to collect and remit sales tax if they delivered more than $100,000 of goods and services into the state or engaged in 200 or more separate sales into the state on an annual basis. Although the Court found that the relatively simple approach in South Dakota’s law satisfied the substantial nexus standard, it did not provide clear guidance as to what will, or will not, meet that standard in other situations. Accordingly, states that implement more aggressive models than South Dakota will almost certainly face legal challenges.
The ruling also means that, unless Congress enacts a uniform federal standard, retailers will now have to navigate disparate tax systems across the country. This could be especially burdensome on individual sellers and small businesses who have not previously had to grapple the complicated process of collecting and remitting taxes in states where they are not located.
Parker McCay will continue to monitor the impact of this ruling and provide updates on new developments. In the interim, please contact Parker McCay with any questions about the implications of the Supreme Court’s decision in Wayfair on your business.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.