Ideas & Insights

Supreme Court Allows States to Collect Online Sales Tax from Out-of-State Retailers

Supreme Court Allows States to Collect Online Sales Tax from Out-of-State Retailers

In a landmark ruling, the US Supreme Court decided that states can collect sales tax on products their residents purchase from online retailers that do not have a physical presence in the state. The decision reached in the highly-publicized South Dakota v. Wayfair case represents an overturn of the 1992 decision in North Dakota v. Quill (“Quill”). Quill prevented states from requiring retailers to collect sales tax from mail-order catalog purchases if the retailer did not have a physical presence within the state.

In the Wayfair case, three major internet retailers challenged South Dakota’s economic nexus laws, which asserts that if an out-of-state retailer makes $100,000 in taxable sales of property or services, or makes taxable sales in 200 or more transactions, that retailer has established “nexus” or “sufficient physical presence” and is therefore subject to South Dakota’s sales tax laws.

In Justice Anthony Kennedy’s majority decision, he maintains that the North Dakota v. Quill ruling is out-of-date in today’s era of high-volume ecommerce transactions and that the standard established in the Quill ruling resulted in a “judicially created tax shelter” that put brick-and-mortar retailers at a disadvantage. Justice Kennedy also affirmed that South Dakota’s nexus laws “appear designed to prevent discrimination against or undue burdens upon interstate commerce,” making it clear that the Supreme Court decision does not open the door to nexus laws that tax out-of-state retailers in an unnecessarily complex or punitive manner.

To date, 31 states have laws that tax online sales from out-of-state retailers, so South Dakota is not an outlying example. The Supreme Court’s ruling does leave ambiguity among the different interpretations of nexus from state-to-state. The burden now falls on Congress, which has a number of bills that would simplify states’ sales tax laws or create a federal standard for establishing nexus.

The Wayfair ruling will have wide-ranging impacts on both ecommerce retailers and state and local governments. Many of the largest online retailers, including Apple, Target and Walmart already collect out-of-state sales taxes, and won’t be adversely affected. Other online retailers will need to ensure their tax function has sufficiently sophisticated technology and processes to maintain state and local tax compliance. Nearly every state has different rules regarding nexus, the onus will be on the retailer to track, collect and remit sales taxes wherever required.

States with existing nexus rules that defied the previous guidance on physical presence have had their laws validated by the highest court in the nation. States without such laws are likely to move toward implementing nexus laws, but must be careful not to exceed the Supreme Court’s determinations on what is or is not unfair to retailers.

The MGO Tax Practice has experienced advisors navigating complex multi-state taxation regulatory and reporting requirements. For questions regarding the Wayfair ruling, nexus determination, or other multi-state sales tax issues, please reach out to us here.

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