A New Era for Internet Sales Tax

June 26, 2018

Wayfair, you’ve got just what I need.” That’s the jingle we hear at the end of a Wayfair commercial (go ahead, sing it in your head; we’ll wait).  But, the Court’s decision in South Dakota v. Wayfair certainly did not give online retailers just what they need in terms of clarity as to what to do now. To our knowledge, the U.S. Supreme Court does not have a jingle.

One thing is clear: if you sell things online, it is officially time to get organized since more than a few states will pick June 21, 2018 (the date of the Court’s decision), as the date you have to start collecting sales tax. Here is a brief rundown of what we know following the Court’s decision.

As we discussed following oral arguments in the case, the question before the Court was whether it should overrule another Dakota case, Quill Corp. v. North Dakota, that required a retailer to have a physical presence in a state before it had to collect sales tax.

The Court answered that question in a 5-4 decision. Quill is overruled, and physical presence is no longer a requirement for a state to require out-of-state sellers to collect sales tax. But what is required?

The Court stopped short of creating a reviewable standard against which state (and local) sales tax laws would be tested for Constitutional muster. The Court did comment on the South Dakota law and provided reasoning as to why it was Constitutional in the majority’s view.

Opponents of the South-Dakota-type laws included small businesses hoping to avoid the burden of collecting sales tax in thousands of state and local sales tax jurisdictions across the country all with potentially different rules. The Court acknowledged as much, indicating that this is particularly true “for small businesses that make a small volume of sales to customers in many States.”

However, the South Dakota law was Constitutional because it “afford[ed] small merchants a reasonable degree of protection” in three ways:

  • It is limited to merchants doing a “considerable amount of business” in South Dakota (the South Dakota law applies to sellers with either over $100,000 in gross sales or more than 200 total sales to South Dakota residents);
  • It did not apply retroactively; and
  • South Dakota is a party to the Streamlined Sales and Use Tax Agreement.[1]

So, we are left pondering how each of the above three factors weighed into the Court’s decision. That is, would a limit of $50,000 gross sales or 100 total sales also afford small merchants a “reasonable degree of protection”? Would $10,000 and 10 be acceptable, as long as the state is a member of the Streamlined Sales and Use Tax Agreement? Further litigation – or Congressional action – will need to occur before these questions can be answered.

Without Quill’s physical presence requirement, the question is whether the retailer’s activity in question creates a “substantial nexus” to the state. Nexus is created when an organization “avails itself of the substantial privilege of carrying on business” in the state.

As to the parties to this case (Wayfair, Inc., Overstock.com, and Newegg, Inc.), the Court reasoned that “both the economic and virtual contacts” that these online retailers had to South Dakota were “clearly sufficient” to create nexus. This is especially true, the Court said, in that the retailers were “large, national companies that undoubtedly maintain an extensive virtual presence.”

So, what is “extensive virtual presence” you may ask? Good question. We’ll get back to you.

Some wonder if Congress will ultimately act to clear up some of these open questions. In fact, four of the Supreme Court justices dissented to suggest that this is exactly how this case should have played out; without judicial action and with deference to Congress.

Moving forward, some states will need new legislation to adapt to the new sales tax world. Some have statutes that already expand their reach to the full extent permitted under the Constitution. And some, like Wisconsin, try to incorporate and allow for changes to “federal law,”[2] leaving open the question of whether a Supreme Court decision counts as a federal law or whether further legislation will be needed.

[1] The Streamlined Sales Tax Governing Board’s stated purpose is to “[a]ssist states as they administer a simpler and more uniform sales and use tax system.” See http://www.streamlinedsalestax.org/. As the name suggests, the initiative was created to produce a more streamlined system by which retailers collect and remit to party-States sales tax on all sales. The initiative has stalled with only twenty-four current members.

[2] Wis. Stat. § 77.51(13g)(c) provides that its sales tax laws apply to any business “unless otherwise limited by federal law.”