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U.S. Supreme Court Hears Sales Tax Nexus Case

Publisher: Day Pitney Alert
April 18, 2018
Day Pitney Author(s) Glenn G. Rybacki

On April 17, the United States Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc. The Court, in considering this case, revisits its 1992 decision in Quill Corp. v. North Dakota, which held that the United States Constitution's commerce clause prohibits states from imposing the burden of collecting sales tax on out-of-state retailers that do not have a physical presence in that state. Since that decision, states have taken numerous steps, either through legislation, regulation or administrative ruling, to recover uncollected taxes primarily from online sales. In recent years, those aggressive efforts have expanded with the goal of inducing the Supreme Court to reconsider Quill, and have culminated in the Court's decision to hear Wayfair.

In 2016, South Dakota passed Senate Bill 106, which required retailers to collect state sales tax based on the retailer's economic presence rather than its physical presence in the state. The State sought to enforce this legislation against Wayfair and a number of other e-commerce retailers having no physical presence in the State. After state court decisions in South Dakota failed to uphold the State's efforts, based on the physical presence requirement imposed by Quill, the State filed its petition for a writ of certiorari.

South Dakota, in its petition, urges the overturning of Quill, due in part to the changes in the online market since Quill, the significance of lost revenues to the states and the advantages afforded to e-commerce retailers and corresponding harm caused to brick-and-mortar stores.

Wayfair, in its petition, counters, in part, that the complexity of the different state and local taxes continues to create an onerous burden on retailers, and the economic effects on state and local governments, as well as brick-and-mortar stores, are significantly less than those asserted by the State.

With the Court likely to issue a decision this summer, collection requirements for state and local sales tax could change significantly. Should the Court overturn Quill and put forth a new standard for nexus, retailers could find themselves with compliance obligations in states that they didn't have before. However, if the Court upholds Quill, retailers could find themselves the targets of continued aggressive state legislation and taxing authorities pushing the boundaries set by Quill.

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