Coming to Terms with the Supreme Court’s Wayfair Decision

July 11, 2018

On June 21, the Supreme Court released its decision South Dakota v. Wayfair, Inc., a challenge to a South Dakota law that required out-of-state sellers that sold more than $100,000 in goods or engaged in 200 or more transaction in the state to collect and remit sales tax “as if the seller had a physical presence in the state.” A number of online retailers filed suit against the law, as two prior Supreme Court decisions, National Bellas Hess, Inc. v. Department of Revenue of Ill. (1967) and Quill Corp. v. North Dakota (1992), held that an out-of-state seller’s responsibility to collect and remit sales taxes depended on whether the seller had a “physical presence” in the state. 

The Quill decision dates from an era when the internet had not yet even entered the consciousness of the public at large, let alone reach the level of omnipresence it has today. E-commerce has since exploded. To be a retailer in 2018 involves having a website and selling goods online, even if brick and mortar stores are also part of the portfolio. As websites know no bounds, this means even small, local retailers can have a national presence despite a limited or nonexistent physical footprint. This also means that many online retailers were not required to collect sales tax.

The development of e-commerce since 1992 heavily influenced the majority opinion, as Justice Anthony Kennedy wrote, “[t]he internet’s prevalence and power have changed the dynamics of the national economy.” Finding that the physical presence test was no longer workable in the modern internet-driven commercial era, the Court overruled nearly 50 years of precedent and threw out the test. Instead, it held that as long as a commercial activity had a “substantial nexus” with the taxing state, that state could impose sales tax. Here, it found that the “substantial nexus” was met based on the “economic and virtual contacts” the retailers had with South Dakotans.  

Chief Justice Roberts’ dissent, joined by Justices Breyer, Sotomayor, and Kagan, argues that the decision to get rid of the physical presence rule should be made by Congress, under its commerce clause power. The dissent argues that the Court glosses over the damage the decision could cause for small and “micro” businesses on the internet.

This decision could prove problematic for marketers as they promote their products for sale. The variety of products and services covered by sales taxes by various states – and the rates charged within states – differs substantially. For example, some states tax candy bars made with flour differently than those made without it. Colorado taxes coffee cup lids but not coffee cups. New York does not tax whole bagels, but if the bagel is sliced, it’s taxed. Retailers and others with an online presence must be prepared to collect and remit sales taxes wherever they operate – and understand what is taxed and what is not, or face legal consequences. The thresholds set by the South Dakota law, which the Court majority defines as a “safe harbor,” could be easy to be met even for small scale retailers. If a startup retailer trying to become the next Amazon now has to comply with a patchwork of state tax laws, the startup may just give up rather than adding vitality to the economy. How advertising will be utilized as a basis for nexus may become an ever more significant issue in the future. Also, with Justice Kennedy’s departure and the Court so closely divided, this area may see some further modifications soon. 

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