On June 21, 2018 the U.S. Supreme Court ruled five to four in South Dakota v. Wayfair, Inc. vacated and remanded the lower court decision, holding that physical presence is no longer required for states to assert a seller’s obligation to collect that state’s sales tax. Previously, under National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, and Quill Corp. v. North Dakota, 504 U. S. 298, the Supreme court had held that a state may not require a business with no physical presence in the State to collect that State’s sales tax.
While previously states could still collect use tax from consumers, compliance was low and states were estimated to be losing between $48 million and $58 million annually. State have been seeking ways to capture that revenue, including seller’s such as Amazon that were sent buyers through links on paid affiliates located in the State, or requiring sellers to send lists of purchasers to the states to pursue use tax collection.
With many different state and local tax rates and rules how items are taxed, it can be burdensome on remote sellers to comply.
Leading up to Wayfair, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State,” covering only sellers that annually: (1) delivered more than $100,000 of goods or services into the State; or (2) engaged in 200 or more separate transactions for the delivery of goods or services into the State.
Under the Commerce Clause, two primary principles mark the boundaries of a State’s authority to regulate interstate commerce State regulations may not discriminate against or impose undue burdens on interstate commerce. Prior Supreme Court precedents sustained state taxes that (1) apply to an activity with a substantial nexus with the taxing State, (2) are fairly apportioned, (3) do not discriminate against interstate commerce, and (4) are fairly related to the services the State provides, Complete Auto Transit, Inc. v. Brady, 430 U. S. 274, 279.
Due Process required that there be “some definite link, some minimum connection, between a state and the person, property or transaction [the State] seeks to tax.” Miller Brothers Co. v. Maryland, 347 U. S. 340, 344–345.
Before Complete Auto, the Supreme Court held in Bellas Hess that a “seller whose only connection with customers in the State is by common carrier or … mail” lacked the requisite minimum contacts with the State required by the Due Process Clause and the Commerce Clause, and that unless the retailer maintained a physical presence in the State, the State lacked the power to require that retailer to collect a local tax. 386 U. S., at 758. In Quill, the Court overruled the due process holding, but not the Commerce Clause holding, grounding the physical presence rule in Complete Auto’s requirement that a tax have a “substantial nexus” with the activity being taxed.
The Wayfair majority opinion found that the physical presence rule is not a necessary interpretation of Complete Auto’s nexus requirement, and a seller’s physical presence in a State is not necessary to satisfy Due Process. The majority noted that Quill created a judicial tax shelter for businesses that sell their goods and services to the State’s consumers facilitated by technological advances, but limit their physical presence in a State. That imposed an arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow in favor of “a sensitive, case-by-case analysis of purposes and effects,” West Lynn Creamery, Inc. v. Healy, 512 U. S. 186, 201. The majority that absent Quill and Bellas Hess, the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing State, and that here the nexus is clearly sufficient. The Court noted that the South Dakota Act applies only to sellers who engage in a significant quantity of business in the State, and any remaining claims regarding the Commerce Clause’s application in the absence of Quill and Bellas Hess may be addressed on remand.
Justice Roberts delivered the dissent of the remaining four Justices. Justice Roberts stated that the majority disregarded the costs that its decision will impose on retailers. Many retailers will likely have difficulty correctly calculating and remitting sales taxes on all e-commerce sales, with over 10,000 jurisdictions that levy sales taxes, each with “different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence” in the jurisdiction.” The Supreme Court in Quill “tossed [the ball] into Congress’s court, for acceptance or not as that branch elects”, and that Congress has been considering whether to alter the rule established in Bellas Hess for some time. Unlike the Court, legislators can more directly consider the competing interests and have the flexibility to address those concerns in a wide variety of ways.