In last week’s landmark ruling, South Dakota v. Wayfair, the United States Supreme Court overturned a previous decision that made it difficult for states to require online retailers to collect and remit sales tax on transactions within their borders unless the retailer had a physical presence within that state. The Supreme Court’s ruling in Wayfair sets the stage for a windfall of sales tax revenue if state legislatures get into action and pass statutes requiring exactly that.
How It All Started
In 2016, facing continued sales tax revenue losses, the South Dakota legislature enacted a law requiring out-of-state sellers to collect and remit sales tax. The law applied only to sellers who had delivered more than $100,000 in goods or services annually to the state or engaged in 200 or more separate transactions for the delivery of goods or services for delivery into the State. (SDCL §10-64-2) In response to the law, Wayfair, Overstock.com, and Newegg filed suit arguing the law was unconstitutional because it violated the current standard set by the Supreme Court in Quill v. North Dakota over twenty-five years ago. (504 U.S. 298 (1992)) The Quill rule prohibited a state from requiring a business to collect and remit state sales tax unless the business has a physical presence in the state.
The Quill rule essentially created a loophole that gave out of state businesses, and especially online businesses, an advantage over businesses with storefronts or physical connections with a state. In South Dakota alone, it was estimated that the loophole caused the state to lose an estimated $48 to $58 million in tax revenue.
In its opinion, the Court recognized the rule created by Quill had become far removed the realities of commerce today. Times have changed and the Court’s decision in Wayfair recognizes the challenges states face in trying to recapture loss tax revenue that is estimated to be as high at $33 billion per year.
A New Twist on an Old Rule
The Wayfair ruling removed the requirement that a company be physically present in a state before it can be required to collect and remit sales tax. This decision takes away remote sellers’ advantage over brick and mortar stores created by the old rule.
Several states already had laws in effect aimed at recovering tax revenue on the estimated $453.5 billion in e-commerce sales in 2017. Many more will be enacting laws to fit within the parameters established in Wayfair.
The first requirement articulated under Wayfair is that the activity being taxed must have a substantial nexus with the taxing State. South Dakota’s law fit within this definition since it only applied to sellers that delivered more than $100,000 in goods or services into South Dakota or engaged in 200 or more separate transactions for the delivery of goods and services into the state on an annual basis.
Second, a tax law imposed by a state cannot discriminate against interstate commerce or create an undue burden upon it. South Dakota’s law had a built-in safe harbor for businesses who conducted limited business in South Dakota. Also, the tax is not applied retroactively.
Additionally, South Dakota is one of more than 20 States that adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes and streamlines the process of sales tax collection. While the process of collecting and remitting tax to multiple states may have been burdensome in 1992, the technology available both through the States and through private providers streamlines this process and makes it easier for out of state retailers to collect and remit sales tax.
Minnesota is among the 20 states with an economic nexus model currently in place. Additionally, it is also a member of the Streamlined Sales and Use Tax Agreement. Its current economic nexus is limited to companies with a physical presence in the state or those with an affiliate or solicitor in the state. After the Wayfair ruling, the Department of Revenue issued brief guidance to assist sellers until it provided further guidance within 30 days. Companies completing online sales to Minnesota citizens should work with counsel and/or tax professionals to ensure they are in compliance if and when Minnesota issues further guidance.
For small businesses and individuals thinking about creating an internet-based startup company, it is essential they work closely with counsel to determine whether they will have obligations under various state laws to collect and remit sales tax. Navigating complex tax laws at both the federal and state level with the aid of knowledgeable tax counsel will help to reduce the risk of running afoul of laws as states continue to make changes to take advantage of the opportunity to capture some of the revenue they have been missing over the last 26 years.
For almost 20 years Kim Lowe has lawyered from the trenches. Kim lawyers from experience, using her knowledge of the law and understanding of how both for-profit and nonprofit business enterprises operate.
Rachell Henning is a second- year student at Mitchell-Hamline School of Law's innovative Hybrid program. Rachell is an Avisen Fellow who enjoys spending time with her husband and two young daughters when she is not working or studying.