South Dakota vs. Wayfair – State Sales Tax and State Income Tax
SOUTH DAKOTA V WAYFAIR INC.
A VERY IMPORTANT DECISION FOR YOUR BUSINESS AFFECTING STATE SALES TAX AND STATE INCOME TAX
On June 21, 2018 the Supreme Court rendered a decision with far reaching and substantial implications for many businesses. The purpose of this communication is to inform you of the importance of this decision and to encourage you to contact us to discuss how this decision could affect your business and operations.
The History
In Quill Corp. v. North Dakota (“Quill”), the U.S. Supreme Court held that a state could not require a seller to collect and remit sales tax in a state unless the taxpayer had a physical presence in the state. Since that decision, businesses have generally understood that they were not required to collect and remit sales tax in another state unless they had a physical presence in the state.
In 2016, South Dakota directly challenged the Quill decision by enacting a law requiring remote sellers (sellers without a physical presence in the state) to collect and remit sales tax to the state if the seller had sales exceeding $100,000, or 200 separate sales transactions, with South Dakota customers.
The Decision
On June 21, 2018 the U.S. Supreme Court overturned Quill in South Dakota v. Wayfair, Inc.(“Wayfair”), concluding that “the physical presence rule of Quill was unsound and incorrect. In doing so, the Supreme Court struck down the physical presence standard to create state sales tax nexus and instead, established economic nexus as the new standard.
Uncertainty Remains
The U.S. Supreme Court remanded the case to a lower court in order to determine if the South Dakota law is constitutional. In its decision, the U.S. Supreme Court cited several factors that appeared to support the constitutionality of the law.
Currently, more than 20 states have enacted similar legislation and more states are expected to follow. Under these laws, remote sellers are required to collect sales tax (or comply with use tax notification requirements) in a state if their business, measured by either sales volume and/or the number of sales transactions, exceeds certain minimum thresholds. The precise thresholds and effective dates of these laws vary from state to state. These laws are likely to face court challenges to determine if they are constitutional.
Further adding to the compliance complexity, many states have enacted and other states are likely to enact economic nexus standards for state income tax, not just sales/use tax.So physical presence is no longer the nexus standard when evaluating whether or not a business should collect and remit sales tax to a specific state, and it is important that you understand this important concept.
This represents a seismic change in nexus standards for sales, use and income tax purposes. Previously issued guidance related to state filing obligations for sales, use and income taxes may no longer be appropriate in view of the 2018 U.S. Supreme Court decision. The Wayfairdecision may require your business to register, collect and remit sales tax in additional states and file state income taxes in additional states.
We strongly encourage you to contact us to discuss your specific situation.