Your Business and the New Internet Sales Tax

Tax | July 23, 2018 | Holtzman Partners

What Does the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., ET AL. mean?

On June 21, 2018, the U.S. Supreme Court in a 5 to 4 decision overturned the previous Quill[1] and National Bella Hess[2] decisions that required a physical presence for a seller to have sales tax nexus in a state.

In deciding South Dakota v. Wayfair, Inc., ET AL., 585 U.S. ___ (2018) (“Wayfair”), the U.S. Supreme Court has opened the door to states requiring remote sellers to collect sales/use taxes based on having “substantial nexus” per Complete Auto Transit.[3] The majority of the U.S. Supreme Court no longer felt restrained by the doctrine of stare decisis and considered Quill[4] “unsound and incorrect” in light of the realities of today’s internet economy.

In rejecting “physical presence” as the standard in determining “substantial nexus” for the purposes of sales/use tax nexus, the concept of “economic nexus” as put forward in legislation by certain states such as South Dakota is now no longer a hypothetical. Remote sellers must now be conscious of the amount of sales of goods or services into states with “economic nexus” thresholds.[5]

The U.S. Supreme Court did not make its own “bright line” economic nexus threshold but upheld the threshold South Dakota enacted. South Dakota requires out-of-state sellers to collect sales/use tax if the seller annually either has more than $100,000 in sales of goods or services or has 200 or more transactions in which goods or services are delivered into the state. Besides providing a safe harbor for small businesses that do not exceed its economic nexus threshold, the U.S. Supreme Court also noted that South Dakota’s law was not retroactive and that South Dakota is a party to the Streamlined Sales Tax Agreement in which member states enact sales tax legislation in conformity to the uniformity and simplification principles of the Agreement.

What will change?

It is likely that many of the states without “economic nexus” will now seek to enact similar legislation to South Dakota in the quest to finally tap into the potential sales/use tax revenue currently uncollected by remote sellers. There will also be a likely increased interest by the business community and other parties in getting the U.S. Congress to finally pass federal legislation to provide some “bright line” safe harbor threshold for small businesses and perhaps some uniformity and simplification that states must follow in requiring remote sellers to collect sales/use tax. The U.S. Supreme Court left open legislation by the U.S. Congress to regulate interstate commerce as provided by the Commerce Clause under the U.S. Constitution.[6]

When will this happen?

It depends and we may have to wait and see. The ruling has already gone into effect in states with “economic nexus” legislation, but it is up to each state to decide if they’ll be implementing any changes to their sales tax laws.

How does this affect your business?

It’s hard to tell yet how exactly this will affect Texas businesses, since it’s up to each state whether to update its sales tax laws as a result of this ruling. Texas ecommerce businesses making interstate sales of taxable goods or services will need to be aware of which states have “economic nexus” and the triggering thresholds.

Our tax team at Holtzman Partners is ready to answer any questions you may have and is happy to discuss further how you can prepare your business for this new ruling. Please contact our team at 512.610.7245.


[1] Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

[2] National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967)

[3] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)

[4] Id.

[5] Currently, approximately 9 states and the District of Columbia have “economic nexus” legislation and another 4 states have a version called “marketplace facilitator nexus” which seeks to make certain third-party marketplace facilitators responsible for collecting sales/use tax.  Additionally, numerous states have adopted “click-through nexus” and/or “affiliate nexus” legislation and two states have “cookie nexus” legislation under the theory that cookies or aps accessed by consumers create a physical presence in the state.

[6] U.S. Constitution, Article I, Section 8, Clause 3

 

By guest author, David Somerville of Somerville State Tax Consulting

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