States may now require online sellers to collect sales tax on out-of-state transactions, thanks to the South Dakota v. Wayfair ruling the Supreme Court of the United States released today.
In the 5-4 decision authored by Supreme Court Justice Anthony Kennedy, the court over-ruled two previous rulings (Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois) while describing Quill’s physical presence rule as “unsound and incorrect.” Although the court’s decision to overrule Quill seemed a likely outcome according to many experts earlier this year, the court’s April 17 oral arguments suggested that a Quill reversal was not at all a sure thing.
That’s why states and traditional brick-and-mortar retailers may be applauding today’s decision even more enthusiastically. States can now collect more tax revenue. And leaders within many bricks-only stores have for years pointed out that Quill’s physical presence requirements gave many out-of-state online retailers the advantage of avoiding the sales-tax collection burden.
On the other hand, retailers that currently sell remotely into jurisdictions where they are not collecting and reporting taxes face a potentially significant challenge. These companies should immediately review their current sales tax processes and supporting technology to make sure they can accommodate any new requirements that now apply to their online sales – in South Dakota as well as in 44 other states with similar requirements that had been in limbo until today’s Supreme Court ruling.
Not all interstate online sellers will be required to collect sales tax under specific state requirements. According to South Dakota’s requirements, only sellers whose in-state transactions crossed a defined threshold were required to collect and remit sales tax. The Supreme Court viewed that these types of thresholds help to prevent discrimination against different size businesses from undue burdens on interstate commerce. States that do not already have similar thresholds in place will need to determine how to apply the new nexus standard.
For affected online retailers, it may be prudent to take the following steps:
- Start gathering data on gross revenues and/or the number of transactions that occur within states where the company sells remotely.
- Prioritize states where the company has the greatest economic presence and create a plan to register to collect and remit sales tax (e.g., via a marketplace, or with a hosted, or cloud-based, technology solution).
- Evaluate the financial statement impact of remote seller compliance.
- Review invoicing processes and controls, as invoicing errors that occur after the decision is finalized likely will result in more significant customer satisfaction and cash flow risks.
We’ll keep you posted as we continue to assess the Supreme Court’s Wayfair decision and its far-reaching implications.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.