A recent Supreme Court case overturning the 1992 Quill Corp. v. North Dakota (“Quill”) decision marks the beginning of a new era for many businesses with an online presence. On June 21, 2018, in South Dakota v. Wayfair, the Court revisited Quill, ruling that the existing standard for determining whether a business has a “physical presence” in a state is outdated and infringes upon the state’s right to tax sales made to customers in the state. According to the Court, the evolution of technology calls for a more appropriate rule—one that does not place local businesses subject to state taxes at a disadvantage or disparately impact the state’s ability to generate revenue for important programs such as education and infrastructure.
Leading up to this precedential case, South Dakota’s legislature passed SB 106, requiring online retailers with more than $100,000 in annual sales of goods or services or 200 separate transactions with customers in South Dakota to collect and remit sales tax. Concern from states like South Dakota are not surprising, as annual mail order sales have surged from $180 million in 1992 (the year Quill was handed down) to a whopping $453.5 billion today. As a result, states have lost billions of dollars in revenue, negatively impacting their ability to fund areas such as education and infrastructure.
Respondent Wayfair, Inc. raised concerns of increased burdens on behalf of many online retailers. Some of these fears include increased operating costs, retroactive application of state tax law, difficulty maneuvering amongst the various complex state tax structures, and ultimately a loss in revenue. Though the Court agreed with the legitimacy of such concerns, it also noted that they do not justify limiting a state’s constitutional right to collect sales taxes from e-commerce consumers. Further, undue burdens (especially on small businesses) can be resolved through helpful software programs, legislation from Congress, and protections granted through the Court’s Commerce Clause doctrine. In this particular case, the Court found South Dakota adequately addressed these concerns, as its Act provides protection for businesses with a small number of transactions, the Act does not apply retroactively, and the state has made substantial efforts to simplify its tax system by being one of twenty members of the Streamlined Sales and Use Tax Agreement.
Along the lines of Wayfair’s policy critiques, the dissent concluded that the likelihood of disruption within the realm of U.S. interstate commerce suggests that Congress—not the Supreme Court—is better equipped to handle the flawed ruling in Quill. Congress not only has the capacity and ability to research any potential adverse consequences of such a drastic policy shift, but also can create alternative solutions to efficiently rectify any state revenue-related issues.
Following this decision, businesses can expect additional states to jump on the new opportunity for sales tax collection, and possibly further litigation regarding implementation. While the Court in Wayfair fails to address the constitutionality of other states’ tax collection policies, both the majority and dissent agree the Quill physical presence rule no longer applies to our modern-day society. Until then, we await legislation from Congress that either creates a uniform standard, or that addresses any adverse consequences of this change in interstate commerce policy.
* Breeana Minton contributed to this post.