Supreme Court Trumps Quill
In its highly anticipated opinion in South Dakota v. Wayfair, issued yesterday, the United States Supreme Court, by a 5-4 majority, overruled its prior decision in Quill Corp. v. North Dakota, which had held that a vendor must have a physical presence in a state to allow a state to impose a sales tax collection obligation on the vendor. The opinion held that the physical presence rule of Quill was unsound and incorrect and detailed the flaws in Quill. The Court stated that Quill was wrongly decided in 1992, and that the Internet revolution since that time makes the decision even more egregious, noting the fact that Amazon has surpassed Walmart as the largest retailer.
The opinion holds that the nexus prong of the Commerce Clause simply asks whether the activity sought to be taxed has a substantial nexus to the taxing state, which is established if the taxpayer or vendor avails itself of the substantial privilege of doing business in the state. The Court found that Wayfair’s economic and virtual contacts with South Dakota were clearly sufficient to establish nexus. The opinion suggests that a vendor doing the amount of business over the state’s threshold of $100,000 of sales or 200 transactions into the state would have availed itself of the substantial privilege of doing business in South Dakota. The Court also noted that the vendors in the case were large, national companies who undoubtedly had a large virtual presence in the state.
The Court’s decision raises significant concerns for most Internet sellers, which may now face liabilities for years of uncollected sales taxes, and will face the cost of collecting sales taxes on future sales. Although the Court suggested that other aspects of the Commerce Clause doctrine might be relied upon by small businesses to prevent a sales tax collection responsibility, it declined to address those potential aspects because those issues were not before the Court. The Court also noted that Congress could address such concerns if it deems it necessary.
Of course, much of the impact on these Internet businesses will depend on how individual states respond to the decision. Only Congress can protect and ensure the vitality of small and growing e-tailers in the Internet age. Without Congressional action, many Internet sellers may be forced to pull the plug on their business operations or otherwise limit sales into specific states.
The decision will also support the broad application of nexus for other types of taxes, such as gross receipts-based taxes. For example, Ohio’s commercial activity tax bright-line nexus statute will benefit from the Court’s decision.
We will monitor how states will react and are prepared to assist clients with understanding and managing past exposure and future compliance challenges presented by this historical decision.