In a much anticipated decision, the US Supreme Court in South Dakota v. Wayfair, Inc. declared, by the narrowest of margins, that a state may require an internet seller to collect sales and use taxes even if the seller lacks physical presence in the state seeking to impose the obligation to collect its tax. In Wayfair, five justices in an opinion by Justice Anthony Kennedy overturned the Court’s 1992 decision in Quill Corp. v. North Dakota. Quill had held that a state may enforce a sales or use tax collection obligation only if a retailer has physical presence in the state.
Wayfair is an important decision, though much of the popular reporting about it has been overstated. Internet and mail order sales have always been taxable to the consumer making the purchase. The problem has been that most internet and mail order consumers ignore their legal obligation to self-report their remote purchases and pay the tax themselves. However, in recent years, sellers like Amazon have increased their sales tax collection activity as they expanded their physical presence in different states by building distribution centers and conventional brick-and-mortar stores.
While only five justices favored overruling Quill, no justice thought that the physical presence rule makes sense in 2018. The divide in Wayfair was between those justices who concluded that the Court itself should overturn the physical presence test and those justices who preferred for Quill, and the physical presence test to be adjusted or reversed by Congress.
The Court’s decision of Wayfair overturning Quill and the physical presence test changes the political dynamics of taxing internet sales. Any state can now adopt South Dakota’s remote seller statute and be confident that its law is constitutional. The South Dakota statute imposes sales tax collection responsibility if, in the current or prior year, a seller had gross sales revenue in South Dakota in excess of $100,000 or made 200 or more “separate transactions” in South Dakota. South Dakota’s law is purely prospective and makes no effort for force electronic or mail order sellers to collect or pay past sales taxes.
If a state deviates from the South Dakota pattern, it risks a legal challenge to its statute. If, for example, a state uses a lower sales threshold to trigger an out-of-state retailer’s collection responsibilities, or imposes retroactive liability on out-of-state retailers for taxes they failed to collect in the past, the state risks a legal contest. It is thus likely that most states will adopt the South Dakota formula.
Wayfair presents the remote sales industry with an interesting political choice. Until now, the internet and mail order sales lobbies have successfully blocked in Congress legislation which would have overturned Quill and its physical presence test. If the remote sales industries conclude that the South Dakota statute imposes too onerous obligations on out-of-state sellers, the industry can seek federal legislation to make those rules more favorable to internet and mail order sellers.
If so, the proverbial political shoe will be on the other foot. Until now, the internet and mail order sellers resisting sales tax collection responsibilities have had the political advantage of defending the status quo. All they had to do in Washington was stop federal legislation overturning Quill. Our political system, with its many choke points, gives great advantage to the side opposing congressional action.
Now, in the wake of Wayfair, it is the remote sellers who are likely to seek federal legislation to protect their interests by reducing their sales tax collection responsibilities.
The post-Wayfair world will also present legal and political challenges for the states expanding the sales tax collection duties of internet retailers. An important issue for the states will be the aggregation of related firms: As states expand the tax collection responsibilities of remote sellers, those sellers will be tempted to divide themselves into separate entities, each with sales below the threshold triggering the obligation to collect sales taxes. The states will respond with legislation which treats as a single entity firms owned or controlled by the same interests. The Internal Revenue Code contains several statutory formulas which deem for tax purposes nominally separate but commonly controlled firms to be treated as a single entity.
In sum, the import of Wayfair should neither be understated or overstated. Many internet sellers, such as Walmart and Amazon, had collected state sales taxes under Quill because such sellers, besides their electronic sales, have physical presences through their brick-and-mortar stores and warehouses. However, as to the considerable world of internet sellers without such physical presence, Wayfair has leveled the playing field. Purely remote sellers making isolated and inconsistent sales into any particular state will still not be required to collect sales tax. But internet and mail order firms will be required to collect taxes when their respective sales into any state trigger the kind of activity described in the South Dakota statute approved by the Supreme Court. The expansion of the sales tax obligations of these internet sellers will make the states’ sales taxes fairer and more efficient by treating electronic and conventional, brick-and-mortar sales in the same way.
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