In a move that seemed inevitable since the first dot-com sale was completed, on January 12, the United States Supreme Court agreed to hear a case through which they will re-consider the primacy of “physical presence” in determining a sellers’ obligation to collect and remit sales tax across the country. Businesses need to immediately begin considering the steps they need to take to support what could be a greatly expanded sales tax compliance obligation in the very near future.
While the U.S. Congress has been debating any number of bills which would overturn the “Quill” doctrine for close to a decade, momentum truly began to build when Justice Kennedy, in Direct Marketing Association v. Brohl (575 U.S. (2015), drafted a concurring opinion in which he stated that the power technology affords business to establish economic presence across the country dictates:
[T]here is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, “interstate commerce may be required to pay its fair share of state taxes.”
States across the country, desperate to close their “tax gap,” took this statement as a call to arms. Among the jurisdictions heeding Kennedy’s call, South Dakota enacted S.B 106 which requires businesses to collect sales tax from South Dakota consumers if:
- The remote seller’s gross revenue of sale of tangible property, electronically transferred products, or services delivered into South Dakota exceeds $100,000 or;
- The remote seller has 200 or more separate transactions of tangible property, electronically transferred products, or services delivered into South Dakota.
As fully expected, a legal battle ensued the moment South Dakota sought to enforce this new law, ultimately leading to the current case before the Court.
The Supreme Court takes on this question at a time when the growing importance of e-commerce to the national economy is beyond debate. Just last month, the U.S. Government Accountability Office issued a report estimating that that state and local governments could gain between $8 to $13 billion if allowed to tax remote sellers. In deciding this issue with clarity and finality, they could also eliminate the hodgepodge of rules enacted across the country where states have sought to nibble at the fringes of Quill by enacting rules (e.g. affiliate and click-through nexus, marketplace provider liability, consumer notice provisions, “cookie” nexus) that attempt to capture at least part of the e-commerce gap. A decision upholding the South Dakota law would align the United States with the clear global trend towards compelling sellers to collect and remit tax on electronically supplied transactions at the customer’s location.
What the future will look like remains disturbingly unclear for businesses. Whatever your opinion of their relative merits, the federal legislation which sought to overturn Quill contained a clear and defined path towards allowing states to tax remote commerce, including a timeline initiated by the state enacting certain minimum simplifications intended to make expanded compliance more manageable. How quickly business may be required to react and whether any substantial simplification would be required in the aftermath of Court decision overturning Quill is entirely unknown. Any business with a significant national economic presence should immediately begin considering their approach towards compliance.
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