Editorial · June 12, 2018
Wayfair Sales Tax Ruling: What Online Sellers Must Do
The Wayfair sales tax ruling has not come down yet, but it is expected within weeks. The U.S. Supreme Court heard South Dakota v. Wayfair, Inc. on April 17, 2018, and the justices usually finish their cases by the end of June. The outcome could change who must collect sales tax on online orders.
What the case is about
South Dakota wants online sellers to collect its sales tax even when they have no store, office or warehouse in the state. Wayfair and other online retailers say the state cannot make them do that. The Court agreed to hear the case on January 12, 2018. South Dakota had lost in its own state supreme court in September 2017.
Sources: Supreme Court docket No. 17-494; SCOTUSblog case page for South Dakota v. Wayfair, Inc.
The old rule from Quill
Today's rule comes from Quill Corp. v. North Dakota, decided on May 26, 1992. Quill sold office supplies by mail and had no stores or sales staff in North Dakota. The Court held that a state could not make such a seller collect its use tax. The seller needed a "physical presence" in the state. That rule built on an earlier case, National Bellas Hess.
The Court also said Congress may be better placed to settle the question. Congress has not passed a law on it. So customers in most states owe "use tax" on out-of-state purchases when the seller does not collect sales tax. Many customers never pay it.
Sources: Quill Corp. v. North Dakota, 504 U.S. 298 (1992), Legal Information Institute, Cornell Law School.
What South Dakota did
In 2016 South Dakota passed Senate Bill 106, which the governor signed on March 22, 2016. The law took effect on May 1, 2016. It reaches a seller with no physical location in the state if either of two tests is met. The first test is more than $100,000 in sales into South Dakota. The second is 200 or more separate transactions into the state.
The law cannot be applied to past sales. Lawmakers wrote it to set up a court test of the Quill rule, and the Wayfair case is that test.
Sources: Iowa State University Center for Agricultural Law and Taxation, "South Dakota Sends Notices to Remote Sellers Concerning New Tax Law."
Two ways the Court could rule
The Court could keep Quill. Then physical presence would stay the test, and South Dakota's law would not stand. Or the Court could overrule Quill. Then states could write rules like South Dakota's, with sales or transaction thresholds instead of a physical test.
No one outside the Court knows which way it will go. SCOTUSblog reported that after the argument the justices appeared divided on whether to overrule the older cases. We will not guess. A seller who plans for both outcomes loses nothing.
Sources: SCOTUSblog, argument analysis for South Dakota v. Wayfair, Inc., April 2018.
What online sellers can do now
You do not need to change anything today. You can still get ready, and these steps are cheap.
- List the states where your customers live and how much you sell into each one.
- Count your yearly sales dollars and your number of orders per state. South Dakota's tests used both.
- Note which of your products and services each state taxes, since the rules differ by state.
- Ask your accountant or tax adviser how your sales system could add tax by state.
- Watch the Court's opinion page and read the opinion itself when it is released.
If the Court overrules Quill, each state will still have to write or update its own rules. Expect more than one rule to follow. Keep your sales records clean now, and you will be ready whichever way the Court rules.
Sources: South Dakota Senate Bill 106 (2016) as summarized by the Iowa State University Center for Agricultural Law and Taxation; Supreme Court docket No. 17-494.
Sources
- Supreme Court of the United States, docket for No. 17-494, South Dakota v. Wayfair, Inc.
- SCOTUSblog, case page and argument analysis for South Dakota v. Wayfair, Inc.
- Cornell Law School Legal Information Institute, Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
- Iowa State University Center for Agricultural Law and Taxation, "South Dakota Sends Notices to Remote Sellers Concerning New Tax Law."