Significant Sales Tax Implications of U.S. Supreme Court Decision in South Dakota v. Wayfair, Inc.
John D. Lindley
Disclaimer: This article is not intended and should not be used as legal or tax advice. If the reader has questions regarding nexus or taxability of sales in Michigan or other states, the reader should communicate with a CPA or legal counsel.
In a 5-4 decision June 21, 2018, the U.S. Supreme Court brought into question decades of sales tax standards for the collection and remittance of taxes and essentially opened the door to new standards at the state-level throughout the Country. The question was, and remains to a certain extent, what is the jurisdictional standard a remote seller (a company selling a good or goods to a customer in another state) needs to meet to trigger a requirement to collect and remit sales tax.
In order for a state to require a remote seller to collect and remit sales tax on a transaction the seller must have “substantial nexus” with the state. In prior Court decisions, the concept of substantial nexus had been further defined as physical presence – having property, office space, people, and/or equipment in a state. This ultimately evolved over time to a standard more along the lines of “activities to establish and maintain a market” in the state, such as periodic presence of a sales team, participation in trade shows, etc.
States have always viewed this standard as a high hurdle and a restriction relative to a revenue source; however, the constitutionality of states’ efforts to address nexus is often questioned (that’s a matter for U.S. Congress or the judiciary). Alternatively, states have focused on efforts to simply understanding of nexus standards and collection processes through consistent definitions of what is taxable and what is not, and sourcing rules to determine where the transaction takes place and, therefore, who is responsible for collecting and remitting. The Streamlined Sales and Use Tax Agreement is an example of these efforts for consistency.
In South Dakota, a law was passed and enacted stated substantial nexus could be established if a remote seller has $100,000 or more in sales or 200 or more transactions in a calendar year – adding an economic presence standard to the historical physical presence standard.
Simply put, in South Dakota v. Wayfair, Inc., SCOTUS determined the South Dakota law establishing an economic presence standard will stand.
In the decision, the Court stated that the prior physical presence standard (more-or-less established in 1992) created a judicial-authorized tax shelter for remote sellers and a competitive disadvantage for brick-and-mortar businesses. Further, the decision specified that in prior decisions, the Court could not have contemplated the role of the internet – where now the nation’s largest retailer is online.
According to the decision, the South Dakota law contained three factors that aided in leading to it being upheld:
1. The $100,000 or more in sales and 200 or more transactions creates a safe harbor for small businesses.
2. The law contains no retroactive application.
3. South Dakota is a member of the Streamlined Sales and Use Tax Agreement to aid in simplification and consistency in application.
The Court; however, left many questions unanswered as well. Will a similar law enacted in another state with a lower threshold (e.g. $50,000 in sales or 100 or more transactions) also be upheld? How about a law that does provide for limited retroactive application? What about marketplace sellers – those entities that don’t sell items but rather creates the marketplace for others to do so (e.g. EBay)?
With Congress expected to take a “wait and see” attitude toward the decision rather than passing a measure to create a federal standard, state legislatures are expected to have an incredible amount of action to establish standards similar to South Dakota.