On June 21, 2018, the United States Supreme Court issued its much-awaited decision in South Dakota v. Wayfair, holding that a state can require an online seller to collect that state’s sales or use tax on products the seller ships into the state, even if the seller has no physical presence there. In reaching its conclusion, the Court overruled its 1992 decision in Quill Corp. v. North Dakota, which had held that a material physical presence of a seller in the state was required under the Commerce Clause and Due Process requirements of the United States Constitution in order for a state to impose a tax collection obligation on the seller. In fact, the Wayfair decision overturned more than a half-century of well-settled law exempting remote sellers from state tax collection obligations, beginning with the Court’s 1967 decision in National Bellas Hess v. Illinois.
The 5-4 Wayfair decision was authored by Justice Anthony Kennedy, who stepped down from the Court this week and who has a long history of playing a central role in the Court’s state tax jurisprudence. The decision clears the way for states to require online sellers and other remote sellers to collect tax from their customers in those states. It is expected that all or nearly all of the 46 state tax jurisdictions that currently impose sales taxes will ultimately require online sellers to collect tax. Indeed, about half of those jurisdictions already have online collection statutes in place, and they can now start enforcing those statutes as a result of the Supreme Court’s decision.
Notably, in reaching its decision, the Supreme Court in Wayfair focused on the fact that the South Dakota tax statute at issue included an exemption for sellers with less than $100,000 worth of sales and fewer than 200 total sales in the state during the taxable year. According to the Court, such an exemption ensured that remote sellers doing a relatively low amount of business in a state would not be unduly burdened by that state’s requirement to collect sales and use taxes. It seems likely that most state statutes that are enacted (or amended) in light of the Wayfair decision will include some similar de minimus rule exempting online sellers who make relatively few sales into a state. In fact, many if not most will probably adopt the same general limits that are included in the South Dakota statute, because it is unclear if lower thresholds will be permissible.
Of course, purchasers of products from online sellers have always been subject to their own state’s tax (commonly known as the “use tax”) on their purchases. Many states (including Colorado) include a line item on their individual income tax form so that individuals can “self-report” their out-of-state purchases each year. As a practical matter, however, states have been unable to collect much tax from individual purchasers, and consequently the inability to require the seller to collect the tax has effectively made products purchased over the internet tax free. All of that now changes as a result of the Wayfair decision.
The Supreme Court’s decision in Wayfair was not unexpected. With the advent of the internet and sophisticated tax collection software programs, the taxpayer’s successful argument in the Quill case – i.e., that it was unduly burdensome for a remote seller to comply with state and local tax statutes – is simply no longer valid. As the Court pointed out, calculating and collecting applicable sales and use taxes is relatively easy to do in the 21st century, and allowing online sellers to continue to avoid such collection obligations creates an unfair pricing advantage over “brick and mortar” businesses that have always been required to collect the tax from their customers.