In South Dakota v. Wayfair, the United States Supreme Court decided on June 21, 2018, that internet retailers could be required to remit sales tax as long as they have a “substantial nexus” to the forum state and no “physical presence” is required (overruling prior Supreme Court decisions to the contrary as outdated).
The former “physical presence” standard stemmed from Quill Corp. v. North Dakota, a 1992 case in which North Dakota unsuccessfully sought to compel the national office supply company Quill to collect sales tax for transactions with North Dakota residents, even though Quill had no physical presence in the State. In 1992, however, internet and ecommerce sales only constituted a minuscule percentage of retail sales in the United States. Justice Kennedy, traditionally the “swing” vote, stated in a 2015 concurrence that “given [the] changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” As of 2017, online sales accounted for 9% of total U.S. retail.
South Dakota seized upon Justice Kennedy’s invitation for “the legal system [to] find an appropriate case for [the Supreme] Court to reexamine Quill.” South Dakota passed a new statute to collect sales tax from out-of-state retailers who had at least $100,000 of annual sales in the State or 200 separate transactions, thus establishing a substantial nexus between the retailer and the State to render the imposition of the tax constitutional.
South Dakota’s argument was clear: the state has a right to collect sales tax for transactions within its state and modern technology permits retailers to navigate the 12,000 different taxing jurisdictions without a significant burden. South Dakota, a state with under 1 million residents, believes its state government was losing between $48 and $58 million annually from lost sales tax recoupment. South Dakota had been unable to compel online retailers to collect its sales taxes because many of the retailers did not have a physical presence in the State.
The retailers’ argument was multifaceted. First, Congress, not the Supreme Court of the United States, is in the best position to regulate commerce. The Constitution directly bestows the ability to regulate commerce on Congress. To this effect, Justices Sotomayor and Breyer noted during the oral arguments that the Court can only be binary in its decision to either overturn Quill or leave the precedent; however, Congress has the capacity to get into the weeds and pass sweeping legislation pointed toward this issue. Second, the retailers also argued that the technological aids and programs for navigating the taxing jurisdictions were not as defined and readily available as South Dakota asserted.
The Court ultimately decided Quill was flawed and overturned the “physical presence” standard. Accordingly, states are now permitted to collect sales tax from out-of-state retailers as long as they have a “substantial nexus” with the state. The Court determined that South Dakota’s law requiring sales tax collection after $100,000 in revenue or 200 separate transactions was constitutional.
Ohio also participated in the South Dakota v. Wayfair case by co-submitting an amicus brief alongside 34 other states. Currently in Ohio, there is a $500,000 sales-receipt threshold before out-of-state retailers are subject to Ohio’s Commercial Activity Tax (CAT) tax, and the Ohio Supreme Court has already determined this limit is constitutional. The Ohio Supreme Court had distinguished Quill on the basis that Quill involved requiring the retailer to collect and remit a sales tax (thus, forcing it to act as an agent of the state), where the CAT tax is a business privilege tax and does not involve the same administrative burden.
As a result of the United States Supreme Court’s decision, it seems likely more states will take advantage of the opportunity to collect sales tax revenue from the increasing number of on-line sales from retailers that have a “substantial nexus” with each such state. Given the limit in South Dakota was $100,000 in annual sales or 200 separate transactions, the bar has not been set very high.