By: James S. Rollinson, Jr., CPA
Two old court cases were very favorable to the online retailer but unfortunately, do not reflect the digital world we live in today. “National Bellas Hess, Inc. v. Department of Revenue of Illinois” in 1967 and “Quill Corporation v. North Dakota” in 1992. Both cases provided a precedent that in order for a state to require an out-of-state retailer to collect and remit sales tax on sales made to an in-state customer, the out-of-state retailer had to have a physical presence in their state. Companies selling over the internet have been doing business this way for many years to maintain a competitive edge by having lower overhead costs while substantially increasing revenues to reach out to more customers. By not having a physical presence in other states, they did not have to comply with the sales & use tax laws a brick and mortar business would need to do creating an unfair advantage for the online retailer. For the out-of-state retailer, the state would then have to rely on their own in-state customer to remit a use tax, which is a difficult hurdle to enforce. Sales tax revenues for many states were significantly declining due to the number of online retailers.
To argue in favor of the out-of-state online retailer, there are more than 12,000 state and local sales tax jurisdictions. Can you imagine small to mid-sized businesses trying to comply with an overwhelming number of jurisdictions following the constantly changing rules and tax rates, as well as the administrative filing burdens to avoid penalties? This sounds like the Supreme Court should take a closer look at the matter. On June 21, that is what they did.
On June 21, 2018, the Supreme Court acknowledged these two court cases mentioned above were obsolete, so in “Wayfair, Inc. v. South Dakota”, the Supreme Court ruled in favor of South Dakota requiring Wayfair to collect and remit sales tax on sales made to the customers in South Dakota. While Wayfair did not meet the physical presence standard similar to other case decisions, the Supreme Court recognized we live in a digital world and times have changed. The Supreme Court focused more on the “economic nexus” law imposed by South Dakota, instead of actual physical presence in the state. Under South Dakota’s law, an out-of-state seller who delivers more than $100,000 in goods into South Dakota, or engages in 200 or more separate transactions for the delivery of goods or services in the state, require the seller to collect and remit the sales tax. Economic nexus is becoming more of a reality for businesses. Advertising on the web creates a virtual connection between businesses and their out-of-state customers.
So where do we go from here? The recent Supreme Court decision in Wayfair does provide a greater opportunity for states to if they have not done so already, establish reasonable economic nexus standards to impose on out-of-state businesses that sell to their in-state customers. Those economic nexus standards imposed cannot create the undue burden on interstate commerce and must be fair to businesses. One of the standards in the Wayfair case is a State, as South Dakota does, provide a business to use a Streamlined State Sales and Use Tax Agreement. This type of agreement simplifies the filings and makes it much easier for businesses to comply. States that do not offer this program may face a tougher challenge trying to overturn the physical presence standards.