In June, the Supreme Court overturned a ruling that shielded sellers with no physical presence in a buyer’s home state from collecting sales tax. “The impact of the court’s decision to overturn the Quill case will be far-reaching, as states are now free to levy taxes on sales of goods and services regardless of physical presence in the state,” said Chris Falco, a founding partner of Falco Sult.
However, other requirements of the “Commerce Clause” of the Constitution will still apply, as well as other nexus tests. Previously, the U.S. Supreme Court established a general rule of substantial nexus which required an out-of-state seller to have a physical presence in the state before the state can require the seller to collect and remit sales and use taxes.
“Physical presence is generally created by having employees or owning/leasing property in a foreign state,” noted Falco. “Companies that solicited sales by mailing catalogs or flyers to out-of-state residents were not required to collect sales tax because they would be ‘unduly burdened’ and were determined to not have a physical presence.”
The Quill case brought about two different factors when determining whether a company may be liable for sales tax: the Due Process Clause and the Commerce Clause. The Due Process Clause addresses the fairness of governmental activity, while the Commerce Clause addresses the effects of state regulation on the national economy. In this case, Due Process focuses on whether a taxpayer has fair warning that their activity may be subject to taxation in another jurisdiction. The Commerce Clause focuses on ensuring a state doesn’t place impermissible burdens on interstate commerce.
In June, the Supreme Court ruled that “… the physical presence requirement of Quill is unsound and incorrect…” and went on to address several factors in overturning the decision. Some of the factors mentioned include the following:
- A business does not need a physical presence in a state to satisfy the demands of due process.
- Based on the physical presence test, economically identical entities are treated different for arbitrary reasons.
- The Court should not maintain a rule that ignores substantial virtual connections to the state.
- Attempts to apply the physical presence rule to online retail sales have proved unworkable.
This decision allows states to enact laws that would require remote sellers to collect and remit sales or use tax regardless of the physical presence tests. The seller would likely still need to have a substantial nexus with the state for the requirement to be enforceable. The Court blessed South Dakota’s internet sales tax law that required most sellers with at least $100,000 in sales or 200 or more transactions annually in the state to collect South Dakota sales tax.
“Many states are taking South Dakota’s lead and implementing laws that are at least what the South Dakota’s standard requirements are,” concluded Falco. “Some are looking at higher thresholds and a few have gone lower. Over the next year, we should see a majority of the states with some law in place.”