Changes to State Sales Tax Filing Requirements Following the USSC’s Ruling in the Wayfair Case

On June 23rd, the Supreme Court issued its decision in the South Dakota v Wayfair case. In a 5-4 majority, the Court overturned the Quill physical presence standard for nexus that had been the law of the land for sales tax purposes for the past several decades.

Before we get into the meat of the case, let’s review a few terms:

  • Nexus – Having nexus in a country, state, locality or other tax jurisdiction simply means that you are required to file and are subject to tax in that jurisdiction. How you determine whether or not you have nexus is determined by several factors and varies by jurisdiction
  • Physical presence standard – A test for nexus, which had been around since the Quill v North Dakota case in 1992. The Supreme Court’s decision in Quill made it so that a state cannot require a business to collect sales tax in that state unless the business has a physical presence in that state

Why Did This Case Come About?

The genesis of this case was a paragraph from a concurring opinion in another case on an unrelated interstate commerce issue. Justice Kennedy specifically wrote that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill“. Kennedy’s concurrence was taken by many analysts and states as an indication that Kennedy was inviting a case to force the Supreme Court to review Quill. This led to at least twenty states developing so-called “kill Quill” legislation, forcing out-of-state vendors to collect state sales tax, as a way to provide for a legal vehicle to bring a case to the Supreme Court for a formal review of Quill. South Dakota was the first state to have passed its laws, filed lawsuits against out-of-state vendors, and progressed their case through the state courts to appeal to the Supreme Court for this purpose.

The Supreme Court’s majority reasoned that the physical presence standard becomes further removed from economic reality every year due to the increasing volume of internet sales. One thing to note, however – the Court did not rule on the constitutionality of the South Dakota law. It was remanded to lower courts to test the constitutionality in the absence of the Quill physical presence standard (which the USSC removed). The Court did, however signal that the safeguards put in place by the South Dakota law would be likely to result in minimal burdens to interstate commerce (and would therefore be more likely to stand up to a test of constitutionality). These safeguards include:

  1. At least $100,000 of in-state receipts
  2. A 200 in-state transaction threshold
  3. Application of the law to only prospective transactions. The absence of applying these laws retroactively seems to be a key to their constitutionality
  4. State participation in the Streamlined Sales Tax Compact (an agreement to standardize some aspects of sales and use tax, which currently includes 23 states)

Note –  States currently have varied thresholds for in-state receipts and in-state transactions that differ from South Dakota, with some states having in-state receipts thresholds as low as $10,000

What Does This Mean You?

  • We are going to have to work together to identify the prevailing laws in the states to which you ship sales of tangible personal property (a.k.a. goods)
  • There is going to be an increase in the number of compliance issues for sales tax, and that number is going to steadily increase as other states adopt similar laws
  • It may be worth exploring a service that provides sales tax compliance services, such as Avalara or TaxJar, which are becoming more and more attractive as sales tax compliance becomes more and more complex and laws continue to change. If you’re interested in exploring one or more of these options, let us know! We can help ensure a smooth integration between your sales tax compliance software and your existing billing, accounting and other systems

Have any questions on anything you just read? Not sure how this change is going to affect your business? Give us a call! We can help you set up and execute a plan to make sure you stay compliant and nothing slips through the cracks!