By Erika Diebert, CPA, Tax Manager
ASL Tax Group
The U.S. Supreme court recently made a landmark decision in South Dakota v. Wayfair. The case has changed the rules on the taxability of internet sales. The court decided for South Dakota and allowed the state’s ability to tax internet sales of consumers who lack physical presence in South Dakota. Since 1992, the Supreme Court decision in Quill Corp v. North Dakota has been the standard on when states can impose sales tax on retailers. The Quill decision required some minimum physical presence of property or employees before states could impose sales tax. As technology has advanced and consumers have turned to the internet for retail activities, the Quill standard has imposed a barrier on the individual states’ ability to tax sales activities occurring within their borders. Many states have reacted by imposing new standards in an effort to circumvent the Quill decision. Some of these standards include cookie nexus or click through nexus that put simply, create the minimum presence needed to impose sales tax through defining the presence of technology as physical presence of property. Up until now the Supreme Court has declined to hear a case involving the state’s new imposition of these nexus standards that do not follow the Quill decision, until now.
The South Dakota v. Wayfair case challenged the application of sales tax to internet sales of retailers that did not meet the physical presence standard of Quill. The court decision has now opened up the door for states to impose sales tax on sales previously off limits. Although this will definitely make things more complicated for retailers, it was not a no holds barred decision for the states. The Supreme Court justices explained that this imposition of sales tax was not a burden to interstate commerce because of the simplicity of South Dakota’s law. The law does not apply retroactively, includes a safe harbor for minimal business transactions, imposes a simplified tax structure, and allows taxpayers to use a free software to calculate and remit. The court specified in its decision that a more complex sales tax structure would be seen as a burden to interstate commerce and would not be upheld by the courts decision. The justices also urged action by congress to make legislative changes to simplify the administration and application of sales tax. At the moment there are proposals but nothing has gotten traction in congress.
What’s Next? – We will be keeping tabs on any future legislative changes but we anticipate many more states will update and impose sales tax laws based on the findings in the Wayfair case. If you have specific questions on how this may impact your business, please feel free to reach out to our team here at ASL.