By the end of June, the U.S. Supreme Court will render its decision in the South Dakota v. Wayfair, Inc. case. This decision could completely change the state sales tax landscape—is your company prepared for the potential outcome?
Currently, 45 states and the District of Columbia impose a sales tax on transactions occurring in their jurisdiction (Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a sales tax). In Wayfair, the Supreme Court will decide whether it should overturn a physical presence standard upheld in the 1992 Quill Corp. v. North Dakota Quill case. In Quill, the Court upheld a former case requiring that a business must have a physical presence in a state before a state can require it to comply with its sales tax laws.
The arguments on both sides of the Wayfair case are very compelling. South Dakota contends that markets have changed since Quill was decided. For example, Quill was decided before businesses were utilizing the internet to sell their products. Wayfair argues it is too burdensome for businesses to collect sales tax in every jurisdiction imposing a sales tax (there are currently 12,000 sales tax jurisdictions).
South Dakota’s legislation that is in question requires a business with 200 transactions or more, or with $100,000 in sales, to collect South Dakota sales tax. No physical connection with South Dakota is required to meet this threshold. The statute also does not provide any guidance as to what South Dakota means by the amount of sales (is it taxable sales or all sales?) and what is meant by transaction (is it an invoice, or every line item on an invoice?). Many states have enacted similar taxing schemes, but some are putting these laws on hold until the decision is rendered in Wayfair.
Instead of enacting a sales tax collection standard, other states have enacted a reporting and/or notification requirement to customers that “use” tax might be due on purchased items. Similar to the South Dakota statute, the states enacting a reporting and/or a notification requirement have established a threshold of activity in their state that requires a business to comply with the requirement. This requirement can be quite onerous for a business to comply with, but the penalties can be very significant.
States are also pursuing Amazon through the court system to turn over the list of vendors they are conducting business with; in particular, those businesses utilizing Amazon as a fulfillment service. This will give states the ammunition to go after other businesses that might have sales and/or inventory in their state, but are not collecting sales tax.
Many individuals have ventured a guess as to what the outcome might be in the Wayfair case, but I can tell you that no one can predict how the Court will decide. I have read the transcripts of the case and listened to the oral arguments and don’t know how it will be decided.
Whichever way Wayfair is decided, the decision could have a significant impact on your business. There will be far-reaching ramifications not only for online retailers and catalog businesses, but also for those businesses involved in manufacturing that have a customer base throughout the U.S.
Between Wayfair and the new federal tax reform, it is a great time to be a state and local tax (SALT) geek. Please continue to monitor Skoda Minotti’s blog for additional information on the Supreme Court decision and issues related to federal tax reform.