On June 21, 2018, a closely divided U.S. Supreme Court handed down a highly anticipated decision in South Dakota v. Wayfair, ruling that states can require most online retailers and many other sellers to collect sales tax, upending over two decades of legal precedent. Impacted businesses include software vendors, equipment retailers, information sellers, and any other business selling goods or services subject to sales tax.
The majority opinion was authored by Justice Anthony Kennedy, joined by Justices Clarence Thomas, Samuel Alito, Ruth Bader Ginsburg, and Neil Gorsuch.
Overturning the 1992 Supreme Court ruling in Quill Corporation v. North Dakota with a 5-4 vote, the Court struck down the in-state physical presence requirement before a state could require a business to collect sales tax. In its challenge, South Dakota argued that “times have changed.” In 1992, Amazon founder Jeff Bezos was still working on Wall Street, years away from his first garage book sale. In that year, mail-order sales totaled $180 million, a fragment of the $453.5 billion estimated 2017 e-commerce retail sales.
The Court’s decision quoted a recent article showing that Amazon had surpassed Walmart as the nation’s biggest retailer: “When it decided Quill, the Court could not have envisioned a world in which the world's largest retailer would be a remote seller.”
The Court laid out why South Dakota’s law, which requires remote sellers that have over 200 annual transactions or $100,000 in annual sales in South Dakota to collect the State’s sales tax, is not a burden on interstate commerce. Specifically, Justice Kennedy pointed out the concise revenue or transaction threshold, the lack of retroactive application, and South Dakota’s adoption of the Streamlined Sales and Use Tax agreement (“SSUTA”). The SSUTA is intended to simplify a state’s sales tax system by reducing administrative and compliance burdens, requiring simplified rate structures, having uniform definitions of products and services, and a single state-level tax administration.
Four justices (Chief Justice John Roberts, Justice Stephen Breyer, Justice Sonia Sotomayor, and Justice Elena Kagan) dissented. While they agreed that Quill may no longer be relevant, the dissenting justices argued that Congress should address the issue. Given Congress’s historical inability or desire to intercede on state tax matters, it will likely fall to the states to interpret the Court’s ruling. The likely outcome, at least in the short term, will mean additional confusion and costs to many businesses that will now be subject to sales tax collection, remittance and reporting requirements in multiple new jurisdictions.
Please contact a member of Citrin Cooperman’s State and Local Tax (SALT) team if you would like to learn more about how this could potentially impact your business.