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Most Impactful State and Local Tax Ruling in More Than 25 Years Expected to Significantly Alter E-Commerce Industry

State and Local Tax Group
06.22.2018 | Client Alert

The U.S. Supreme Court has ruled in favor of South Dakota in a decision that will dramatically impact the way sales taxes are collected and remitted moving forward (South Dakota v. Wayfair, Inc.). The main issue in this case was whether the physical presence nexus standard, as set forth in an earlier opinion of the Court (Quill Corp. v. North Dakota), was still required before a state could subject a remote vendor to its sales tax laws.

The high court’s 1992 ruling in Quill, which involved a mail-order company, held that retailers can only be required to collect sales or use taxes in states where the company had a “physical presence” in the state. South Dakota passed its economic nexus law in 2016 with an eye toward overturning the physical presence standard of the Quill decision. South Dakota’s law requires retailers with more than $100,000 in annual sales in the state or retailers that completed 200 or more separate transactions annually in South Dakota to collect sales tax on all taxable sales into the State.

The Court in Wayfair felt that South Dakota’s tax system included several features that would prevent against discrimination or undue burdens on interstate commerce. In so finding, the Court held that South Dakota:

  1. Provided a safe harbor for small businesses that only transact a minimal amount of business in South Dakota;
  2. Required no obligation to collect and remit sales tax retroactively; and
  3. Is a member of the Streamlined Sales and Use Tax Agreement, which is designed to provide consistency in this area amongst member states.

State and local governments have long claimed that they have been missing out on billions of dollars of sales tax collections from online merchants and other remote sellers. As a result of this decision, states now have an avenue to require remote sellers with no physical presence to collect and remit sales tax. This could have a significant impact on the e-commerce industry as well as state revenue budgets.

It remains to be seen whether other states will follow suit but there are already a number of states that have enacted similar laws to South Dakota. Whatever follows, it seems clear that the landscape for the way many remote vendors conduct business and collect sales taxes has been meaningfully altered.

Questions? Contact your Berdon advisor.

Berdon LLP New York Accountants