On January 12th, the Supreme Court agreed to hear the Wayfair case which will finally address whether states can broadly require online retailers to collect sales taxes even if they lack a physical presence in the state.
Until now the Supreme Court has always maintained that Congress should make the final call on this issue. When Congress’ previous attempts to address this issue with the Marketplace Fairness Act, the Remote Transactions Parity Act and other proposed legislation failed to gain momentum, the states decided to take a different approach to get the Supreme Court to decide on the physical presence requirement with South Dakota leading the way.
In 2016, South Dakota passed economic nexus legislation to require online merchants with no physical presence in the state to collect and remit sales taxes if annual sales in the state exceed $100K, or if they have more than 200 separate transactions in a year. Although this move was clearly unconstitutional, South Dakota sued a few large online retailers (Wayfair, Overstock and Newegg) to set the test case in motion.
The courts in South Dakota struck down the law as they were bound by the Supreme Court precedent in National Bellas Hess v. Illinois and Quill v. North Dakota. Those decisions issued in 1967 and 1992 respectively required that retailers have an obligation to collect and remit sales and use tax on sales to in-state customers only if they have a “physical presence.” These decisions, however, were intended to address catalog sales and much has changed with the explosion of internet sales and the advent of tax technology. Therefore, the states’ claims that the current landscape results in an unjust loss of state tax revenues in the billions and is straining state budgets is a reality. In addition to the states, the brick and mortar retailers were also pushing for the Supreme Court review as they claim it undermines fair competition since they already have to collect sales and use taxes, however, their online rivals do not.
My feeling is, due to recently passed tax reform, the Supreme Court surmised that Congress would not review this issue any time soon. This is why it’s not surprising to me that the high court agreed to hear the case at this time.
In case you haven’t heard, the Supreme Court could hear oral arguments in the case as soon as April. If the court does schedule for review this spring, a decision could be forthcoming by the end of June. Rest assured, we’ll keep you posted as this potentially ground-breaking tax decision unfolds.
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.