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Sunday, June 24, 2018

Likely That Not All Internet/Web Sales Into a State will be Subject to State and Local Sales Taxes

In South Dakota v Wayfair, Inc., the U.S. Supreme Court overruled its prior precedent regarding sales tax on interstate sales and imposed state sales tax on sellers of merchandise who had no physical location or presence in South Dakota into South Dakota via the Internet .

OLD LAW. 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) had previously held that an out-of-state seller’s liability to collect and remit the tax to the consumer’s State depended on whether the seller had a physical presence in that State, and that mere shipment of goods into the consumer’s State, following an order from a cata­log, did not satisfy the physical presence requirement.

GENERAL COMMERCE CLAUSE LIMITATIONS ON TAXATION OF INTERSTATE SALES. State regulations may not discriminate against interstate commerce, and may not impose undue burdens on interstate commerce. State laws that “regulat[e] even-handedly to effectuate a legitimate local public interest . . . will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefit". In Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977), the Court held it would sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides. The Quill requirement for physical presence was based on "substantial nexus" requirement.

COURT DETERMINATIONS. The Supreme Court found that the physical presence test is flawed and abrogated it, and thus overruled Quill and National Bellas Hess. So now, the mere selling into a state via the Internet can subject the seller to sales taxes in the location of the purchaser.

SCOPE OF THE RULING. The substantial nexus test remains, as do the other Brady requirements and the requirement not to unduly burden interstate commerce. These requirements were found to be met in this case, in part based on several aspects of South Dakota law and the taxpayers: (a) the tax applies only to sellers that, on an annual basis, deliver 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, (b) there was no retroactive application of the tax, (c)  South Dakota is a party to the Streamlined Sales and Use Tax Agreement which reduces administrative and compliance costs per a single, state level tax administration, uniform definitions of products and services, simplified rate structures, and other uniform rules, (d)  the sellers were large, national companies with an extensive virtual presence, and (e) the State provided sales tax administration software.

Unduly complex collection mechanisms, lack of exceptions for small businesses or those with minimal sales in the locality, and other fact-specific questions may make the collection of sales taxes illegitimate in other jurisdictions based on the facts applicable to the applicable sales and taxing jurisdiction. While regimes with similar rules to South Dakota will likely pass constitutional muster, other broader or more burdensome regimes may not.

South Dakota v Wayfair, Inc., 585 U. S. ____ (2018).

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