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Friday, June 22, 2018

US Supreme Court Brings BIG News for Sales Tax - Wayfair Decision

In a 5-4 decision, the U.S. Supreme Court ruled on 6/21/18 in South Dakota v. Wayfair, et al that the 1992 Quill decision is "unsound and incorrect"! This is big news and will affect thousands of medium to small vendors selling goods (and sometimes services) to customers in states where the seller is not physically present. [the "et al" are Newegg and]

In 1992, the Quill decision was significant as the Court ruled that for sale tax nexus, physical presence is not needed under the Due Process clause, but is needed under the Commerce Clause. Under the Due Process clause of the 14th Amendment, the question is whether it is fair for a state to impose its laws on someone. Where sellers are purposefully making a market or reaching out to customers in a state, they can be subject to that state's laws even without physical presence.

But for Commerce Clause purposes, the 1992 Court was concerned that with over 9,000 state and local jurisdictions able to assess sales/use tax with varying rules, definitions and procedures, making non-present vendors collect would impede interstate commerce.  Congress though, controls the Commerce clause and the Court noted that Congress could provide a different rule if it desired.

States, eager to be able to get sellers to collect sales tax rather than trying to get in-state consumers to self-assess and pay a use tax which most people have no clue about, wanted Congress to allow them to go after non-present vendors.  Usually, the federal proposals, dating back to 1994, include a de minimis seller exception, such as for vendors with no more than $1 million of sales.

The majority in Wayfair found that Quill was not the correct approach. So, what is the proper standard? Well, the law before the Court was South Dakota's law enacted in 2016 to challenge the Quill decision. That law (SB 106) provides that a seller has sales tax nexus if it has either over $100,000 of sales of goods or services into the state or 200 or more transactions. SB 106 also specified that it would not apply retroactively.

The majority found Quill "flawed" in that physical presence is not the requisite interpretation of the nexus requirements laid out by the Court in 1977 in Complete Auto Transit. They also found that Quill "creates rather than resolves market distortions" and created a "tax shelter" for remote vendors.

I interpret that as the Court realizing that perhaps physical presence was not the appropriate standard to determine nexus. It does present an oddity that a small vendor with 2 items of inventory in a state could have sales tax nexus while a very large company selling items costing lots of money (so a large company likely with a tax department) would not have to collect sales tax if it had no physical presence in the state despite having a significant economic presence in the state.

The dissent basically took the approach that Quill has worked and not impeded commerce or sales tax collection. Per the dissenters, "states and local governments are already able to collect approximately 80 percent of the tax revenue that would be available if there were no physical presence rule."

Will this hurt small sellers such as those who sell via eBay or Etsy? Probably not. States will have to enact economic nexus rules, likely similar to that of South Dakota which the Court just upheld. Or, perhaps state tax agencies can enact regulations to allow economic nexus for sales tax. This all also depends on existing law in the state and how broadly (or narrowly) it might already be written.  While over $100,000 of taxable sales into the state is significant, 200 or more transactions is not. That is a problem. Making a seller who sells 200 $5 items into a state have to deal with that state's sales tax procedures will be costly for that seller.  I think a sales volume approach is better than a number of items approach.

Also, South Dakota is part of the Streamlined Sales and Use Tax Project so offers free software to vendors to ease collection. That is a good idea for states to do as well. I don't think all states need to join the SSUTA, but providing low-cost tools to aid sales tax compliance is a good idea.

In May, both Iowa (SB 2417) and Illinois (HB 3342; A 100-0587) enacted laws similar to those of South Dakota. I expect other states will do the same.

And, perhaps Congress will step in under its commerce clause authority and provide some limitations on what the states can do. Perhaps they will act quickly.  In 1959, following a Supreme Court ruling in Northwestern Cement v. Minn., 358 US 450 (1959) that Congress thought would lead to states harming multistate businesses regarding income taxes, they enacted Public Law 86-272 within 7 months!

Senators Wyden (D-OR) and Shaheen (D-NH) sent a letter to the Small Business Administration on 6/28/18, noting concerns on how states follow the Wayfair decision because it can put a significant burden on small businesses that may have to deal with some portion of the more than 12,000 local jurisdictions that impose sales/use tax. [Senator Sheehan press release of 6/28/18] Senator Tester (D-MT) and others from states with out a sales tax introduced S. 3180, a bill to regulate certain State impositions on interstate commerce.

A bipartisan group of senators and congressmen also filed an amicus brief in Wayfair in favor of the respondents (Wayfair, et al); it included lawmakers from states with and without a sales tax.

One last point - States still need to work to get consumers in the state (both individuals and businesses) to pay their use tax. A law like South Dakota's does not result in sales/use tax being paid on all taxable purchases due to the de minimis threshold and because a state can't easily make non-US vendors collect.

Links: 6/21/18 ruling in Wayfair + 4/17/18 oral argument + links to the 40+ amicus briefs filed.


  • See post for state reactions (continues to get updated).
  • House Judiciary Committee hearing on "ramifications" of the decision to small business and consumers, 7/24/18

What do you think?

1 comment:

Busana Modela said...

Thoughtful blog, thanks for sharing.