What South Dakota v. Wayfair Means for Businesses
With Supreme Court arguments beginning in South Dakota v. Wayfair, Inc., the stakes for your retail clients are high, and it’s important for you and them to understand the possible impacts they will face.
South Dakota v. Wayfair challenges a previous high court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which in turn reaffirmed an earlier decision that a state could require only a business with a physical presence in the state to collect and remit sales tax. Businesses without that physical presence could not be required to collect or remit these taxes.
Since that decision, the rise of ecommerce has led to an explosion in sales by online retailers, but lack of authority has led to the inability of states to collect sales tax on ecommerce sales, resulting in a profound effect on revenue, costing them $13.4 billion in revenue in 2017, according to the U.S. Accounting Office. South Dakota and other states that have no income tax, and therefore rely heavily on sales tax, have been particularly hard-hit by these rules.
On the other side of the argument, online retailers resist sales tax collection because the lower total cost makes their products more appealing. But the states have persisted, and in 2016, South Dakota challenged the physical presence precedent upheld by Quill by creating an economic nexus law that required out-of-state sellers making at least 200 sales – or making more than $100,000 from sales – of taxable goods or services in South Dakota to collect and remit South Dakota sales and use tax.
In constructing the law, South Dakota directly challenged the Quill decision, declaring an “urgent need for the Supreme Court of the United States to reconsider” the physical presence precedent. A court challenge by Wayfair, Inc. has now made its way to the Supreme Court, and arguments are expected to begin on April 17, with a ruling expected by late June. This means it’s time for retailers, and their accounting advisors, to seriously consider the implications this decision will have on their business.
A Decision in Favor of South Dakota
A court decision in favor of South Dakota could play out in a number of ways. Several states have already adopted laws similar to South Dakota’s, hoping that if South Dakota wins, their laws will automatically become legal. However, the court decision could end up being very specific to South Dakota, forcing these other states to examine the specifics of their laws.
Those laws with significant differences would need to be amended or face possible additional court challenges. Either decision could also lead to congressional action.
For example, congress could change federal laws related to sales taxes and nexus, reversing the Supreme Court decision. Congress could also give the states more authority, making it easier for other states to follow South Dakota’s lead.
A Decision in Favor of Wayfair
A decision in favor of Wayfair, Inc. would leave the entire sales tax issue unresolved. Another state would likely immediately step forward to attempt to challenge Quill at the Supreme Court. Wyoming, Indiana and Tennessee all have cases in the pipeline and would do everything they could to distinguish their arguments from South Dakota’s.
In addition, states are taking other actions designed to help them collect sales taxes. For example, some states are adopting marketplace facilitator laws that require marketplaces to collect the appropriate sales tax. This takes the sales tax collection responsibility out of the hands of retailers and puts it on the marketplace, which would not be impacted by the Supreme Court decision.
The Bottom Line
No matter how the Supreme Court decides South Dakota v. Wayfair, online retailers will still have to worry about future sales tax collection requirements. The only real questions are how soon they will need to be able to collect appropriate sales taxes on online sales and the best way to do so.
As a result, retailers should begin immediately working with their tax advisors to identify which states are already collecting sales and use taxes and determine if and how much retroactive liability may exist. They then need to acquire the tools and technology or subscribe to services to ensure they become and remain compliant in those states.
Doing this now will help to mitigate risk in the event of a sudden requirement for tax collection in multiple states – each with its own tax rates and rule changes – and having to spend hundreds of hours manually calculating and filling out returns. Only by developing a reliable system for tracking evolving regulations, assessing their impact on their businesses, and automating sales tax compliance, can retailers face the coming changes with confidence and keep their focus on satisfying the needs of their customers.