At Ketel Thorstenson, we are closely monitoring the recent United States Supreme Court ruling of South Dakota v. Wayfair, Inc. and considering the implications the decision will have on our clients. This article highlights the significance of the ruling and provides a brief overview of events leading up to the decision. We will keep you updated as events unfold in subsequent articles beginning with the fall issue of the KT Addition.
On May 1, 2016, South Dakota Senate Bill 106 went into effect requiring remote sellers to collect and remit sales tax to the state. Online retailers are subject to the law once they either:
- Have annual gross sales of $100,000 delivered to customers in South Dakota or
- Engage in 200 or more separate transactions per year of goods or services delivered to customers in South Dakota
South Dakota estimates that it loses $48 to $58 million annually in lost sales tax revenue and has declared a state of emergency due to the loss. Subsequently, South Dakota sued three of the largest online retailers in the United States (Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc.) for not collecting and remitting sales tax in accordance with the bill. The heart of the issue is whether a state can legally require online sellers to collect and remit sales tax without having a traditional physical presence in the state.
On June 21, 2018, the United States Supreme Court ruled on South Dakota v. Wayfair, Inc., et al. In a 5-4 vote, the Court overturned two prior rulings, Quill Corp. v. North Dakota (1992) and National Bellas Hess v. Department of Revenue of Illinois (1967) and remanded the case back to the South Dakota Supreme Court. This landmark case will have far reaching effects on retailers and consumers.
The requirement to collect and remit sales tax has long been based upon the concept of substantial nexus within the taxing state. Historically, a seller has substantial nexus, and thus must collect and remit sales tax, when it has a physical presence within the state. In the prior court rulings which were overturned, substantial nexus meant having a physical storefront, salesperson, or warehouse in the taxing state. This definition allowed online retailers to avoid collecting sales tax and has subsequently put local retailers at a disadvantage.
We are no longer operating in the same environment as we were back in 1967, or even 1992, when those cases were decided. Due to advances in technology and the Internet, consumers and retailers are more closely connected now than ever before regardless of their closeness to a physical store.
What Happens Next?
The U.S. Supreme Court remanded the case back to the South Dakota Supreme Court to determine if the law meets three other tests for constitutionality. The June 21st ruling only considered the issue of substantial nexus. The three additional issues to be evaluated are:
- Fair apportionment
- Non-discrimination against interstate commerce
- Fair relationship to the services provided by the taxing state
As events unfold, these are some of the questions we will be considering:
- What counts as a “transaction”?
- When does a seller start collecting the tax?
- Once registered, is a seller required to continue collecting regardless of sales volume?
- Will South Dakota’s law become a model for other states?
- How will substantial nexus for sales tax translate to income tax provisions?
- How can we minimize compliance burdens for our clients?
Stay tuned for further discussions in the development of this topic. Call the professionals at KTLLP at 605-342-5630 with any questions or concerns.