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    Locke Lord QuickStudy: U.S. Supreme in South Dakota v. Wayfair, Inc. Overturns Longstanding Limitation on States’ Ability to Compel Sales Tax Collection on Internet and Catalogue Sales: What Happens Now?

    Locke Lord Publications

    The United States Supreme Court on June 21, 2018 issued a decision in the closely watched sales tax collection case of South Dakota v. Wayfair Inc., Case Number 17-494, which can be found here. The 5 – 4 decision overturned the cases of National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), and Quill Corp. v. North Dakota, 504 U. S. 298 (1992), which long ago established a bright-line principle that a state could not require an out-of-state seller to collect sales tax on the sale of a taxable good or service delivered into the state unless the seller had some physical presence in the state. Wayfair abolished the physical presence test.

    Wayfair specifically concerned the validity of a law that South Dakota had enacted as an explicit vehicle to invite the Supreme Court to overturn the physical presence test. The South Dakota law requires sales tax collection by all sellers who sell more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state, without regard to any physical presence in the state. The Court explained at length why its prior cases were wrongly decided, and emphasized that the rise of e-commerce had greatly exacerbated the analytical and practical flaws inherent in the physical presence test. All nine justices agreed that the prior cases were wrongly decided. The four dissenting justices, however, believed the physical presence test was so entrenched that the Court should defer to Congress to enact alternative national sales tax collection standards, which Congress clearly has power to do, and the majority so held.

    The Court remanded the case for further consideration of whether, now that the physical presence test had been overturned, some other principle in the Court’s Commerce Clause doctrine might invalidate the South Dakota law. In doing so, however, the Court seemed to signal that South Dakota’s parameters were reasonable and generally acceptable. 

    Immediate takeaways from Wayfair include:
    • Congress could be under greater pressure to pass federal legislation prescribing uniform national rules for permissible sales tax collection obligations.
    • The Court removed the physical presence test, and suggested that South Dakota’s 200 transaction / $100,000 in sales test may be acceptable, but did not provide firm bright-line guidance. We expect further litigation will be necessary to address unresolved issues and define the new limits for sales tax collection, especially for smaller vendors.
    • Multiple states have already enacted sales tax collection laws similar to South Dakota’s, and we expect many more to enact such statutes as soon as legislative action is possible. Wayfair therefore may quickly subject many internet and catalogue vendors to new sales tax collection obligations in many states.
    • The Court did not address retroactivity, i.e., whether states could assess taxes for prior periods against remote vendors who legitimately did not collect sales tax based on a lack of physical presence at the time of the prior sales.


    We expect further developments, and in the weeks and months to come we will issue updates as the state, federal, and industry issues and reactions come into sharper focus.


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