In a long awaited decision reversing 26 years of existing precedent, on June 21st the United States Supreme Court ruled in South Dakota v. Wayfair, Inc., that states and other taxing jurisdictions could require out of state retailers to collect sales tax on online sales even though the retailers had no physical presence in the taxing jurisdiction.
The South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.” The law covers sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State. Wayfair and other large online retailers with no employees or real estate in South Dakota, filed suit seeking a declaration that the law’s requirements to register for licenses to collect and remit sales tax were unconstitutional under existing Supreme Court decisions.
The Supreme Court decision in favor of South Dakota is monumental, as prior Supreme Court decisions had effectively prevented states (and other taxing jurisdictions) from collecting any sales tax on retail purchases made over the Internet or other e-Commerce route unless the seller had a physical presence in the state. In the past several years, multiple states have adopted laws seeking to circumvent the physical presence requirement. While many of these laws were challenged in court, prior to accepting the Wayfair case, the Supreme Court had refused to hear any case regarding a law challenging the physical presence requirement.
In anticipation of the Supreme Court ruling in Wayfair, numerous states have enacted new laws designed to require on-line retailers to collect sales tax. With the Wayfair decision validating South Dakota’s law, we expect many additional states will adopt laws using volume of sales as a trigger to require sales tax collection.
The decision presents enormous compliance costs for businesses that sell remotely. There are approximately 40 states and 10,000 sales tax jurisdictions in the United States. The laws as to what is taxable and who must collect vary among the jurisdictions. The multiplicity of taxing jurisdictions, frequent changes in sales tax laws, and lack of consistency in the laws will require remote sellers to devote significant time to sales tax compliance. More significantly, it has been our experience that jurisdictions will seek to collect tax on sales as of effective date of legislation eliminating the physical presence requirement. In light of the decision in Wayfair, businesses selling in jurisdictions with statutes similar to South Dakota can expect demands for sales tax owed for past years.
We recommend businesses selling on-line immediately begin to assess their sales tax compliance obligations in light of the Supreme Court’s decision that dramatically changes the collection obligation rules for on-line sellers.