Press Room: Tax Release
Supreme Court to Reconsider Internet Seller Sales Tax
The United States Supreme Court (the Court) has announced that it will hear a case that would allow states to require all remote sellers to collect sales taxes if they meet an economic nexus threshold. The Court is expected to hear the South Dakota v. Wayfair case in April with the Court likely rendering a decision in June. South Dakota and 35 other states have argued that the current physical presence rule is outdated given the significant technological and social changes that have occurred since 1992 when the Court rendered its decision in Quill v. North Dakota. Pursuant to the holding in Quill, an out-of-state seller must have physical presence in a state to be subject to a sales tax collection and remittance obligation in that state.
Revisiting the Physical Presence Standard
When Quill was decided, remote commerce was dominated by mail-order catalogs and the Court ruled that a state may require out-of-state sellers to collect sales tax only if the sellers had a physical presence within the state. With the explosive growth of internet sales over the years, states have felt the impact of lost revenue in their coffers and have put pressure on Congress and the Court to reconsider the issue of collecting sales tax on remote sales. Traditional retailers joined the call for a reconsideration of the holding in Quill by arguing that it is unfair to require them to charge sales tax with each purchase, while online competitors escaped such an obligation.
At the time, the Court called Congress better qualified to overturn the physical presence standard and left it to Congress to decide. However, the House and Senate have not been able to reach consensus on a law to standardize sales tax collection of remote sales. Nearly three years ago, Justice Kennedy suggested in a concurring opinion in Direct Marketing Association v. Brohl II that it might be time to reexamine the holding in Quill in light of dramatic technological and social changes in the intervening years. These comments spurred states to begin passing legislation and promulgating regulations to find the appropriate vehicle to challenge Quill’s physical presence rule. Aside from Justice Kennedy’s comments in the Direct Marketing v. Brohl II case, current Justice Neil Gorsuch voiced skepticism about the Quill decision when he was an appeals court judge, describing the decision as having created somewhat of a judicially sponsored tax shelter. In conjunction with the Court’s willingness to take the case, these comments could signal the Court’s willingness to make a significant change to the physical presence standard.
It is important to note that the eventual decision in this case will directly impact laws similar to South Dakota’s, which impose a sales tax collection obligation on an out-of-state seller if it makes over $100,000 in gross revenue from sales of tangible personal property or services delivered to South Dakota or has 200 separate in-state transactions. However, it is unclear how the case might affect states like Massachusetts that have enacted “cookie” nexus laws or Minnesota and Washington that have passed marketplace facilitator nexus laws. Even if Quill is upheld, it is likely that states may try to implement more provisions like these in addition to Colorado’s reporting requirements, which were upheld in the Direct Marketing v. Brohl case.
For more background on South Dakota v. Wayfair, and the events leading up to the Court’s decision to hear the case, see South Dakota Sets the Stage for High Court to Address Constitutionality of Remote Sales Tax Laws.
Pending the Court’s decision in South Dakota v. Wayfair, remote sellers must evaluate whether to comply with reporting or collection obligations or to rely on Quill in not doing so. The Andersen Tax team is poised to assist clients with their compliance obligations and to help assess potential impact depending on the case’s outcome.