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Major tax news – Supreme Court ruling changes the state & local sales tax rules for online sellers and retailers

US Supreme Court ruling in the case of South Dakota v Wayfair

On June 21, 2018, the US Supreme Court ruled in a 5 to 4 opinion to change a long standing rule regarding the ability of a state to require a seller to collect sales tax even if the seller is not “physically present” in that state. This most recent Supreme Court decision in South Dakota v Wayfair overturns a prior Supreme Court decision from 1992 Quill v. North Dakota. Since 1992, mail order and online sellers relied on the Quill decision to avoid having to collect sales tax if they did not have “physical presence” – property or employees – in that state.

States attempts to circumvent the physical presence requirement

After the Quill decision, due to the potentially significant loss of sales tax revenue and the possible competitive disadvantage to in-state businesses that were required to collect sales tax, many states enacted “economic nexus” rules that sought to require a seller to collect sales tax if their sales to that state exceeded a certain threshold. The South Dakota law in question asserted economic nexus if the seller made more than $100,000 of taxable sales or made taxable sales into South Dakota in 200 or more transactions. Also, in March 2018, Pennsylvania enacted a rule requires online retailers to collect sales tax when internet sales to Pennsylvania customers exceed $10,000.

Until now, sellers could rely on Quill to challenge these “economic nexus” laws for sales tax purposes. The Wayfair decision eliminates the ability to make those challenges.

What should multistate sellers do now that the Quill decision has been overturned?

The Wayfair decision is significant and will likely affect most businesses with multistate sales. Here are some things to consider:

  • Be aware of sales tax statutes in states in which you provide services or to which you send product.
  • Where do you currently collect sales tax?
  • Do you sell through any third-party marketplaces such as Amazon or eBay?
  • Do you use Fulfillment by Amazon? If so, in which states is Amazon storing inventory?
  • Do you have any “click through” agreements with parties to generate sales in other states?
  • What states do your employees or sales reps visit, and what activities do they do there?
  • Do you know what your sales of products and services are by state for the last three or four years in the event of a state audit?
  • Have you ever performed a nexus study?
  • Do you maintain exemption certificates in all states or just the states in which you are currently registered?
  • Could you benefit from a sales tax technology system that would help charge the correct sales tax rate to your customers and ease the filing of returns?
  • Are you a remote seller selling property into states that have enacted notice reporting requirements?

The Wayfair decision definitely changes that landscape for the collection of sales tax in America. While the US Supreme Court decision and the considerations listed above will most likely affect online retailers and sellers, it is important for all sellers, including online retailers, to reevaluate their sales tax compliance systems as a result of this landmark court case.

Contact Barry D. Groebel, Jim Nehr, or your Herbein+Company, Inc. tax consultant to help you with that process.