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Important Implications of the United States Supreme Court Decision in South Dakota v. Wayfair, Inc.

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On June 21, 2018, the United States Supreme Court, in a 5-4 decision, ruled in favor of South Dakota and its economic nexus provisions for sales tax collection. In so doing, the Court overturned its prior decision in Quill (Quill Corp. v. North Dakota).

Quill required that a retailer have a physical presence in a state, in order to be required to collect sales tax for sales into that state. The South Dakota statute requires remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax.

The first question is what effect this will have on out-of-state businesses transacting sales in South Dakota or other states with similar statutes. While specific state guidance should come out over the next weeks and months, the general conclusion is that businesses are going to be required to register and start collecting sales tax in many more states. While only about 20 states have laws similar to South Dakota’s, either passed or currently in the legislature, it is expected that a majority of states will have similar laws by the end of the year.

It is important to understand that these new laws will affect all types of businesses, not only those selling online. Additionally, foreign businesses that have the protection of permanent establishment for income tax purposes are generally not protected for sales tax purposes under treaty.

The implications of increased sales tax costs on businesses was addressed by the Court in its ruling. The majority wrote that those “burdens may pose legitimate concerns ... particularly for small businesses that make a small volume of sales to customers in many States. State taxes differ not only in the rate imposed but also in the categories of goods that are taxed ... Eventually software that is available at a reasonable cost may make it easier for small business to cope with these problems.”

The dissenting opinion, however, stated, “The burden will fall disproportionately on small businesses ... The software said to facilitate compliance is still in its infancy and its capabilities and expense are subject to debate.” Depending on a business’s current system for invoicing and sales tax collection, there may be a significant, immediate cost to complying with sales tax laws in a large number of additional states. The dissenting opinion used the example of Illinois, where Twix and Snickers candy bars have different taxability conclusions. Since Twix bars have flour, they are considered food and exempt from tax; since Snickers bars don’t contain flour and are considered candy, they are, therefore, taxable.

There are additional implications beyond sales tax that also must be considered. The Court’s analysis made reference to and appeared supportive of the ways in which states have started to expand the definition of physical presence. Traditional physical presence isn’t consistent with the “realities of the interstate marketplace.” Massachusetts’ proposed laws, which broaden the definition of physical presence to include phone apps and cookies on computers, was referenced to show the expanding reach of business through technology. It raises the question as to whether a state imposing income tax nexus on a service company that does not have the protection of PL 86-272 because its apps are on the state residents’ phones would be rejected by the Court.

The Court’s decision will have a great impact on the reporting and tax collection requirements imposed on business. Businesses should consult experienced professionals for advice about how to handle this changing landscape.

In summary, this case addresses the issue in South Dakota but sets a bright line standard for sales tax that other states may follow. Business owners and tax professionals will not know what the full impact may be until states issue their own legislation. Then again, each situation will be based on specific fact patterns and details. Please contact your dedicated Marcum professional to address any questions regarding this case.

 
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John Bonk, Senior Manager, Tax & Business

Senior Manager
Tax & Business
Miami, FL
 
 
 
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