On what was easily the most anticipated day in sales tax history, the Supreme Court did what many experts thought they would, ruling five to four in favor of South Dakota’s right to require businesses to collect sales tax on e-commerce sales, even if they don’t have people or property in the state.
In so doing, the Court ushered in a new era for sales tax, overruling Quill Corporation vs. North Dakota, a decades-old legal precedent. This ruling opens the door for governments to collect more than $8 billion dollars in tax from e-commerce sales that were previously off limits.
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We asked our resident sales tax guru and the head of our regulatory analysis team, Charles Maniace, for his initial reactions. Here’s what Chuck had to say:
“We are officially in a new era of sales tax. What we have considered to be foundational principles that define where businesses must collect and remit sales tax, are now entirely out the window. States now have almost a blank slate on which to write, and businesses will face a wave of new rules for tax compliance”
There is, however, still a standard for when businesses will have to charge and remit tax: a ‘substantial nexus.’ What does and does not qualify as substantial nexus will be defined over the next few years, but what we do know is that ‘substantial’ no longer means ‘physical,’ and that’s a huge change.”
What do e-commerce sellers need to know?
“Any business that sells through e-commerce should pay close attention to state rules, especially in the 20 states that have introduced the same or similar rules as South Dakota. Businesses that sell through e-commerce channels will need watch each state in to which they sell goods for new laws that are sure to come quickly, and they will have to monitor whether those states’ will be litigated under this revived standard set by Complete Auto Transit, Inc. v. Brady and Pike v. Bruce Church Inc.”
What should we expect from the states now?
“States now have the ability to articulate that they have a reasonable standard to establish whether a business has substantial nexus that would require it to pay sales tax. In order to pass this standard, the rule must be reasonable and tax compliance must be manageable. The Court was clear to point out that South Dakota created a standard that does not burden commerce. They have a fairly simplified and uniform sales tax structure, their nexus law excludes small sellers, and as a Member State of the Streamlined Sales tax Agreement, they provide taxpayers with affordable software solutions.”
What role will software play moving forward?
“In today’s ruling, the Supreme Court discusses software as a means for easing the burdens of sales tax on businesses of all sizes, which seemed to be a key factor in the ruling. It’s clear the court appreciated the nature of the South Dakota rule, which set a clear threshold for substantial presence and simplified its sales tax regime, including years of work as a member of the streamlined sales tax initiative, of which Sovos has been a part of for more than a decade. This ruling makes it clear that software is an important part of making sales tax compliance manageable and affordable, and as the ruling mentions, many reliable and affordable solutions are currently available from vendors like Sovos. This ruling should drive further adoption of software, particularly among smaller businesses that have largely flown under the radar until now.”
What’s next in the regulatory environment?
“We’ll likely see states quickly enacting existing rules and drafting new ones, but congress is the wild card. Everyone is waiting to see if they will step in to create a standard, which they have a right to do, or leave it to the states.”
About the Author
Charles Maniace is the Director of Regulatory Analysis at Sovos. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos clients continually complaint. Over his 15 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a BS in Business Economics from Bentley College, a JD from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.More Content by Charles Maniace