Everything You Will Need to Know for Remote Sellers & Online Retailers
On Thursday, June 21st, 2018 the Supreme court ruled in favor of South Dakota allowing states to collect sales tax from online retailers. This ruling effectively reverses the decision the Court made in 1992. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court ruled that businesses did not have to collect sales & use tax in a state where they did not have a physical nexus.
The decision prevented states from collecting sales tax on e-commerce sales unless the business had nexus within the state. In writing the prevailing decision Justice Anthony Kennedy wrote that the Quill decision represented “a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers.” He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch, while Chief Justice John Roberts and Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan dissented.
South Dakota SB106
South Dakota Governor Dennis Daugaard signed Senate Bill 106 in March 2016, which went into effect May 1, 2016. SB106 requires any seller of tangible personal property, electronically transferred products, or delivery services into the state, who do not have a physical presence in the state to remit sales tax as if the seller had a physical presence in the state, provided the seller’s gross revenue exceeds $100,000 or if the seller had 200 or more separate transactions.
South Dakota was well aware of the battle ahead and filed for an immediate declaratory judgment. After several battles and losses in the state court system, the US Supreme Court granted the States petition for writ of certiorari on January 12, 2018, and eventually ruled in favor of South Dakota.
The Supreme Court noted several factors in the South Dakota legislation that they believe should be considered when states are determining whether to take remote seller:
- There should be no retroactive application of any new law;
- The application and collection of sales tax should not be a burden to the taxpayers. For example, South Dakota is part of the Streamlined Sales Tax Agreement which encourages uniformity and simplicity regarding sales tax rules across many states;
- All laws should have a reasonable threshold as not to hurt “mom and pop.”
How Will Congress React to South Dakota v. Wayfair
Over the past 15 years, there have been several versions of proposed legislation in an effort to “balance” the playing field with out-of-state sellers, including efforts such as the “Marketplace Fairness Act”. However, Congress has had little to show for its efforts, until now. Heidi Heitkamp (D-ND) who was the North Dakota tax commissioner back in 1992 when Quill determined that physical nexus was needed for companies to be required to collect sales tax, stated back in January of 2018 “I’m absolutely thrilled” when she heard the Supreme Court was going to take up a case on states’ rights to collect sales tax. Now Sen. Heitkamp believes the “States should be given an opportunity” to review the court’s decision and pass its own legislation. Comments such as these would imply that Congress will now take a back seat and see how states will respond. Of course, Congress can’t seem to agree on anything recently, so perhaps this is one less issue they can disagree on.
However, four Senators from States that do not charge a sales tax quickly went to work to introduce the Stop Taxing Our Potential (STOP) Act. The bill will prevent states from (1) the collection of a sales tax, use tax, or any similar tax; (2) the reporting of any information with respect to a tax previously described unless such person had a physical presence in the State. We will wait to see if this bill has any traction, but if the lack of news attention is any indication, this bill is not headed anywhere. Here are a few inspired quotes from several of the bill supporters:
“The Supreme Court got this ruling horribly wrong. New Hampshire small businesses shouldn’t be forced to collect sales taxes for other states,” said Jeane Shaheen (D-NH). “Congress and the Trump administration should work in concert to stop new red tape from hurting American businesses and our local and national economies. That’s why I’m cosponsoring Senator Tester’s legislation to overturn the Supreme Court’s ruling, and will continue to explore other avenues to help businesses that will be affected.”
“Montanans oppose a sales tax and our businesses shouldn’t be forced to collect a sales tax to shore up the finances of other states,” Jon Tester (D-Mont.) said. “This bill reflects the overwhelming sentiment of Montanans and defends our state’s businesses from getting into the sales tax business.”
New Hampshire is taking its effort one step further by calling for a proclamation to declare a special legislative session during its next Governor and Council meeting on July 11th. The proposed legislation would require among other things that any out of state taxing authority seeking to audit or impose tax collection obligations on a New Hampshire business to notify the New Hampshire Department of Justice.
What is The Next Step?
Over the next 3 – 6 months we will see states pass various forms of legislation in light of the Supreme Court Ruling. Those states with legislation already in place will most likely issue an effective date for remote sellers to register and collect sales tax. Companies must decide to register, collect and remit now or wait until each state chooses an effective date for each law. South Dakota must conclude the legal proceeding initiated in 2016 as currently there is an injunction in place.
Since the Supreme Court set aside the South Dakota decision, the case will have to return to the state court system with an expected conclusion of mid-July. We expect many states to apply a January 1, 2019, effective date, but this could happen sooner. Our 50-State Sales Tax Tracker below will be updated as the laws are put into effect. Please check our website for occasional updates and sign-up for our SALT Minds newsletter.
Companies must prepare to collect and remit sales tax in any state with sales over $100,000 or sales more than 200 transactions. For many companies that have only been collecting sales tax in two or three states, this will mean considering new tax compliance software, making the decision on the taxability of their products in these other states, and deciding whether to train staff internally or outsource. Companies should begin this discussion with their tax professionals immediately.
PM Business Advisors is offering a no-cost 30-minute consultation to help companies sort through these issues. See the link to the right to schedule your 30-minute call.
Recent Laws & Threshold Requirements
State Enforcement Announcements
District of Columbia