Press Room: Tax Release

October 06, 2017

South Dakota Sets the Stage for High Court to Address Constitutionality of Remote Sales Tax Laws

On September 14, 2017, the South Dakota Supreme Court decided that Quill Corp v. North Dakota is still the law of the land and struck down the South Dakota economic nexus provision requiring certain remote sellers to collect and remit sales tax even if they have no physical-presence in the state. The highly anticipated unanimous decision in South Dakota v. Wayfair, et al. came just two weeks after oral arguments and is a precursor to other cases winding their way through state courts that also involve similar challenges to the physical-presence requirement set forth by the United States Supreme Court (the Court) in Quill. The South Dakota Supreme Court indicated that regardless of how persuasive the arguments were for revising the physical-presence test, the Court’s decision in Quill remains controlling precedent and deferred to the Court’s prerogative to overrule its own decision. On October 2, 2017, South Dakota Attorney General Marty Jackley announced that South Dakota had filed its petition for certiorari requesting the Court review the South Dakota v. Wayfair case.

South Dakota Challenges Physical Presence Standard

Pursuant to the holding in Quill, an out-of-state seller must have physical presence in a state to be subject to sales tax collection and remittance obligations in that state. On March 22, 2016, South Dakota enacted S.B. 106, which contained economic nexus provisions for sales and use tax purposes as a means for taxing the transactions that occur remotely through online commerce. Effective May 1, 2016, all entities with annual sales in South Dakota exceeding $100,000, or with more than 200 separate transactions in the state were required to collect and remit South Dakota sales and use tax. South Dakota has been transparent about the fact that it hoped the economic nexus law would serve as an opportunity to challenge Quill and, following the enactment of S.B. 106, the state filed a declaratory judgement action against three large online retailers for not complying with the law.

On March 6, 2017, the South Dakota Sixth Judicial Circuit Court found the defendants in South Dakota v. Wayfair lacked physical presence in the state and held in favor of the online retailers while granting their motion for summary judgement. The court also enjoined enforcement of the sales tax economic nexus provisions of S.B. 106. In affirming the state circuit court’s prior decision, the South Dakota Supreme Court determined that, despite South Dakota’s arguments, Quill remains the controlling precedent.

Remote Seller Nexus Takes Hold in Other States

Many other states have implemented remote nexus provisions—some require the collection and remittance of sales and use tax, and others impose reporting requirements. Colorado’s reporting law, requiring remote sellers to report their customer lists if the retailer’s Colorado sales for the year exceed $100,000, was upheld in Direct Marketing Association v. Brohl. The Direct Marketing Association decision sparked a number of other states to impose similar reporting requirements. States have also enacted legislation imposing sales and use tax collection obligations on online marketplace providers and a few states have attempted to establish sales and use tax nexus on remote sellers based on internet cookies. The Multistate Tax Commission (MTC) recently implemented an amnesty program for online sellers making sales through third-party fulfillment centers. Twenty-three states and the District of Columbia have elected to participate in the MTC program which runs until October 17, 2017. See our prior Tax Release on the MTC program for more information.

The Takeaway

Justice Kennedy stated in a concurring opinion in the Direct Marketing Association decision that it might be time to revisit the holding in Quill given the significant technological and social changes that have occurred since the case was decided in 1992. Some advocates for a Quill challenge point to his opinion as a sign that the Court should grant certiorari on the issue of remote nexus. However, Justice Kennedy suggested that an appropriate case be found for the Court to reexamine Quill. It is possible that the Court will determine South Dakota’s fast track challenge is not the right case for granting review. It seems likely that the Court may decide to see how other states rule in other pending Kill-Quill lawsuits and wait for a case involving better developed facts.

With more states enacting economic nexus thresholds, out-of-state sellers still need to evaluate their specific situations to determine if they are subject to sales and use tax obligations in states with economic nexus standards. Remote sellers using an online marketplace may also want to take advantage of the amnesty programs being offered by various states, although the terms of the applicable state’s amnesty should be reviewed carefully. The Andersen Tax SALT team has a number of tools and services available to assist remote sellers with their compliance obligations and can also help in addressing whether an online seller should participate in a state’s amnesty program.

Potential impact to business as well as tolerance for risk must be evaluated in deciding whether to comply or to rely on Quill in not collecting, remitting or reporting sales tax. We will continue to keep you informed of evolving judicial and legislative developments in this important area.