Supreme Court: States Can Require Online Sellers to Collect Sales Tax

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.

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Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.

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