Supreme Court of the United States Rules in Favor of South Dakota
In what is arguably the most significant state tax case in more than two decades, South Dakota v. Wayfair, Inc., the highest court in the land has ruled in favor of South Dakota, stating that states can require out-of-state retailers to charge their customers sales tax even if they don’t have a physical presence, such as a store or a warehouse, in the state.
By the slimmest of margins (5 to 4) in the much-debated case, the Court overruled two prior decisions, Quill Corp. v. North Dakota(1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill.(1967), that elevated physical presence in a state as the condition precedent before the state can impose a sales tax collection responsibility on an out-of-state retailer. Justice Anthony J. Kennedy wrote the majority decision, which held that “the physical presence rule of Quill is unsound and incorrect.” Instead the court endorsed its decision in Complete Auto Transit, Inc. v. Brady (1977) with its 4-part test as the standard for evaluating the validity of state taxes.
Kennedy further stated that “the physical presence rule as defined by Quill is no longer a clear or easily applicable standard, and arguments for reliance based on its clarity are misplaced.“ The court introduced the concept of “substantial virtual connections” to a state which may be considered in determining whether Commerce Clause constitutional requirements are met, and apparently adjudged South Dakota’s alternative requirements of at least 200 transactions or $100,000 of goods or services delivered to the state as adequate protection for remote sellers with minimal connections.
The Court first heard arguments for the case on April 17, 2018, with South Dakota arguing that the states are losing out on sales tax revenues that can be invested in infrastructure, education and healthcare; and that Quill creates a “price advantage” for remote out-of-state sellers, while harming local small businesses. Wayfair, on the other hand, argued that they should not have to collect tax where they are not physically located.
In a statement following today’s ruling, Wayfair commented; “We welcome the additional clarity provided by the Court’s decision today. Wayfair already collects and remits sales tax on approximately 80% of our orders in the United States, a number that continues to grow as we expand our logistics footprint. As a result, we do not expect today’s decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax.”
As I have previously posited, the ruling will have significant ramifications for those companies who have not been collecting and remitting sales tax, and will now be faced with new compliance obligations; not to mention a loss of their so-called competitive price advantage. Those firms must now consider whether their current systems have the ability to accurately calculate, collect and remit the correct tax, and they should be able to respond in the affirmative to these key questions:
The GAGNONtax team would be happy to assess your current approach and recommend enhanced, automated solutions to ensure you can meet current and future collection and remittance obligations.
GAGNONtax works closely with professionals nationwide to solve their tax challenges, using creative strategies and expertly-crafted technology. We have the expertise and experience of the Big Four, but not the layers of people and processes.