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The Wayfair Decision – A Possible Domino Effect?

The Wayfair Decision – A Possible Domino Effect?

Posted on October 16, 2018

Originally published in October 2018

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Current Law on Collection of Sales Tax from Out of State Vendors

Quill Corp. v. North Dakota

The Physical Presence Rule: In 1992, the Supreme Court of the United States held that states cannot collect sales tax from purchases made by their residents from out-of-state vendors that did not have a physical presence within that state.

What Is the Wayfair Case?

South Dakota v. Wayfair, et. al. was a decision issued by the Supreme Court of the United States on June 21, 2018, which addressed a challenge to the Quill Physical Presence Rule.

Case Facts

In 2016, South Dakota passed a law that required out-of-state sellers to collect and remit sales tax on an annual basis if the retailer delivered more than $100,000 of goods or services or engaged in 200 or more separate transactions for delivery into the state. The bill was one of the first so-called "kill Quill" bills.

Upon the new South Dakota law becoming enacted, the State sent out notices to four of the largest out-of-state vendors that the State believed would exceed the sales threshold and were not already collecting sales taxes: Wayfair, Overstock.com, Newegg, and Systemax.

Upon refusal of three of the large out-of-state vendors to comply with the new sales tax law, the state filed a lawsuit against the vendors at the trial court level. The case moved all the way to the South Dakota Supreme Court. However, the South Dakota Supreme Court held, "[h]owever persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled."

As a result, South Dakota decided to petition the Supreme Court of the United States to hear its case and readdress the merits of the Physical Presence Rule under Quill.

The Wayfair Decision

“Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow.”

“The Quill Court did not have before it the present realities of the interstate marketplace, the Internet's prevalence and power have changed the dynamics of the national economy."

As seen in the quotes above, the Court ruled that the applicability of the Physical Presence Rule was outdated. In the absence of Physical Presence Rule, the Court applied the older Complete Auto analysis to determine whether the South Dakota law was constitutional.

The Complete Auto test states that “[t]he Court will sustain a tax so long as it:

Applies to an activity with a substantial nexus with the taxing State,
Is fairly apportioned,
Does not discriminate against interstate commerce, and
Is fairly related to the services the State provides.”

In applying the Complete Auto test, the Court held that the economic nexus threshold created by the new South Dakota law ($100,000 of goods or services or engaged in 200 or more separate transactions) was a proper standard to determine whether a business had a “substantial nexus with the taxing State.”

However, the Court remanded back to the lower courts the issue of whether the law met prongs 2-4 of the Complete Auto test.

Despite the remand of the other issues under the Complete Auto test, the elimination of the Physical Presence Rule was a huge victory for the states. As a result, the Wayfair decision has now opened the door for state legislatures to recraft their laws and regulations.

Post Wayfair

Currently, thirty-two states are acting to pass laws or regulations to require sales tax collection by remote sellers now or in the immediate future.

Preexisting prior to Wayfair: Pennsylvania & Rhode Island (both give retailers a choice between collecting tax or complying with notice-and-reporting laws).
July 1, 2018: Colorado (notice-and-reporting only), Hawaii, Maine, Oklahoma, Tennessee, Vermont.
September 1, 2018: Mississippi.
October 1, 2018: Alabama, Illinois, Indiana, Kentucky, Michigan, Minnesota, New Jersey, North Dakota, Washington, Wisconsin.
November 1, 2018: North Carolina.
December 1, 2018: Connecticut.
January 1, 2019: Georgia, Iowa, Louisiana, Nebraska, Utah.
Not yet formalized: Maryland, Nevada, South Carolina, Wyoming.
In litigation: Massachusetts, Ohio, South Dakota.

What Now?

What if my business meets a state’s sales tax economic nexus threshold? What should I do?

Ensure that the client’s activities actually meet the threshold.
Look into the enforceability of the state’s sales tax nexus law.
Look into whether the client’s goods and services are subject to sales tax within the particular state at issue.
If applicable, advise your client to implement certain technologies or processes to ensure compliance.

Author: William B. Helbling

Originally published in October 2018