Since 1992, the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota has stood for the proposition that a state may not impose a sales or use tax collection and reporting obligation on a taxpayer who does not have a physical presence in that state. Accordingly, if an out-of-state vendor has no physical presence by way of office locations, warehousing, property, or employees in a state, it is not currently required to collect sales or use tax from customers in that state. In a dynamic state tax world, the Quill decision has been one of the few constants upon which taxpayers could rely.
Unfortunately for state taxing authorities, the rapid proliferation of e-commerce over the last 15 years has eroded the sales tax base of many states because more retailers can sell products remotely without the need for a physical presence. To counter this phenomenon, state taxing authorities have been seeking new ways to impose a collection and reporting obligation on taxpayers without a physical presence in state. Many of these efforts involved the enactment of new legislation, regulations, and administrative pronouncements. For instance, South Dakota recently enacted legislation to require sales tax collection for out-of-state retailers having annual gross revenue in excess of $100,000 from sales to South Dakota customers, or who have more than 200 completed sales into South Dakota. Other states have also adopted similar rules.
Not surprisingly, these efforts have been challenged by taxpayers claiming that such state laws violate the physical presence requirement upheld in Quill. In September of 2017, one such taxpayer, Wayfair, Inc., successfully convinced the South Dakota Supreme Court to strike down the South Dakota law in favor of Quill’s physical presence requirement. The South Dakota Attorney General petitioned the U.S. Supreme Court to review the case, requesting that it reconsider its earlier Quill decision. In January of 2018, the U.S. Supreme Court agreed to hear the Wayfair appeal.
The Supreme Court’s decision to hear the case was surprising, given the Court’s traditional reluctance to hear state tax matters. Typically, the Court defers to Congressional action. For the moment, there are many questions regarding the Court’s decision to hear the case, such as:
- Did the U.S. Supreme Court agree to take this case because it intends to overturn Quill?
- If there is no intention of overturning Quill, why not just leave the South Dakota Supreme Court decision in Wayfair stand?
- If Quill is overturned, will the effect of the decision be retroactive?
- If the Court overturns Quill, what will be new standard for requiring out-of-state sellers to collect sales tax?
- Will the Court ultimately leave it up to Congress to establish applicable thresholds?
The mere fact that the Court will hear this case has many pundits suggesting that Quill will be overturned. At the very least, taxpayers should get more definitive guidance from the Court on whether they can continue to rely on the physical presence requirement. In the meantime, taxpayers should consider the possibility that sales and use tax nexus rules may change as a result of this case, and should start to plan accordingly. For more information concerning sales and use tax planning, please contact us.
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