On June 21, 2018, the Supreme Court fundamentally changed the application of state sales and use taxes as applied to one of the fastest growing sectors in the economy – e-commerce. Under this decision, states will be able to require online retailers to collect and remit sales tax to the state where goods and services are provided regardless of whether the retailer has a physical presence in the state. Justice Kennedy delivered the opinion of the Court, joined by Justices Thomas, Ginsburg, Alito, and Gorsuch.
In South Dakota v. Wayfair, the Court overturned more than a quarter-century of precedent in declaring the “physical presence” test dead (the rule that required a seller to have employees or a “brick and mortar” location in a state for the state to be permitted to require that seller collect and remit sales tax). Online sellers of goods and services may be required to collect sales and use tax in a number of new states as a result of the ruling.
A total of 41 States, 2 Territories, and the District of Columbia joined to request this result. Make no mistake, change is coming to the sales and use taxes that businesses will be required to collect and the taxes consumers will be required to pay up front. Gone are the days where online stores like Wayfair can have customers state in their ads that “I bought it online and didn’t have to pay sales tax.” In fact, the Court called that Wayfair ad a “subtle offer to assist in tax evasion.”
In Wayfair, the Court considered South Dakota’s new sales tax statute which requires sellers to collect and remit sales tax in South Dakota if the seller (1) annually delivers more than $100,000 of goods or services into South Dakota or (2) engages in 200 or more separate transactions to deliver goods or services into South Dakota. The Court stated that it was important that the law is not retroactive.
In enunciating a new standard, the Court stripped down existing tests and reverted to an old one – is the state imposing the obligation to remit tax on an activity where the person paying/collecting the tax “avails itself of the substantial privilege of carrying on business in” the state. The Court believed that South Dakota’s thresholds for volume (in number or value of transactions) met that threshold.
The Court explained that the Commerce Clause should require a facts-and-circumstances analysis instead of an objective test and explained that the South Dakota statute simply levels the playing field for in-state and out-of-state retailers. By leaving (very) small retailers unaffected, the Court was not concerned that start-up businesses would be subject to unfair burdens of wide-spread, varying compliance.
The Court left ajar an opportunity to challenge the imposition of an obligation to collect and remit sales tax in other cases by arguing other violations of the Commerce Clause, but summarily rejected the physical presence test. In the future, states that have not enacted the “Streamlined Sales and Use Tax Agreement,” a proposed uniform act to address sales and use tax application, collection, and remittance, as their sales tax regime may find their statutes challenged as overly complex (an issue the Court expressly noted as an area ripe for challenge). The 24 states that have adopted the Streamlined Sales and Use Tax Act have been given the green light to adopt South Dakota’s threshold and begin imposing the obligation on vendors to collect sales tax for online and mail-order sales going forward.
We expect state houses around the country to quickly adopt statues similar to South Dakota’s and impose the obligation on vendors to collect sales tax. Some may push the envelope beyond South Dakota’s 200 transactions or $100,000 sales, but given the extraordinarily low threshold (and low average amount to escape sales tax under those thresholds), this may become the new standard. As the Court noted, this is a way for the States to quickly influx anywhere from $8 billion to $33 billion, collectively, each year. For that much money, even Democrats and Republicans can probably come together.
Matt Scheer is an associate in Gunster's tax law practice.
