Will Supreme Court Change the Foundation of Sales Tax?
With written and oral arguments in the South Dakota v. Wayfair Supreme Court case now on the record, we face a time of uncertainty as we wait for the Court’s decision this summer. Retailers should prepare now for likely changes in how and where they collect taxes — no matter the outcome.
First, some background. South Dakota vs. Wayfair challenges the Supreme Court precedent set in the 1992 case of Quill v. North Dakota. In that case, the Court reaffirmed that states cannot require businesses to collect tax on sales made to their residents unless they have a physical presence in the state.
Since the Quill decision, online sales have grown astronomically, with states reporting billions lost in uncollected taxes. States have passed rules to nibble at the fringes of Quill by capturing as many e-commerce sellers as possible while still respecting the physical presence standard. One example is a Colorado rule requiring non-collecting sellers to notify customers of their obligation to self-remit use tax and send a report to the state disclosing Colorado sales annually. The Supreme Court upheld the constitutionality of this requirement in DMA v. Brohl, with Justice Anthony Kennedy stating:
“There 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.”
This call-to-arms led several states to pass “kill Quill” legislation to collect sales tax from out-of-state vendors, providing the legal vehicle needed to take the case back to the Supreme Court.
The arguments favoring overturning Quill are compelling. South Dakota contends that it's missing out on about $50 million in revenue under the Quill rule, a significant sum for a state with no income tax. The state also cited an estimate that nationwide, losses associated with Quill are approaching $34 billion.
While forecasting the final verdict is entirely speculative, the questions the Justices asked during oral arguments shed light on the issues they will wrestle with in rendering a decision. For example:
- The Court is not limiting its concern to the South Dakota law; Justices are clearly considering the national impact of their decision.
- Retroactivity is a worry. Can the Court side with South Dakota but only apply the new rule going forward?
- Small sellers can’t be overlooked. Is fair competition served by leveling the playing field or by shielding small companies from complex tax requirements?
No matter the outcome, regulatory change is coming. If Quill isn’t overturned, states will find ways to push the boundaries, establishing new laws that attempt to capture this missed revenue. As they prepare for impending changes, retailers should consider whether they have the following:
- A full understanding of what they sell, where they sell and how they sell. This visibility will enable businesses to properly evaluate their compliance risk as the landscape changes.
- An ability to efficiently extract and provide transactional data to regulators from across the country in the event of a sales tax audit.
- A nimble enough process to be ready to register, collect and remit tax in new states quickly. Some states have e-commerce tax laws already approved that go into effect in the event Quill is overturned.
- Scalable technology that enables accurate tax calculation for all product types, tax rates and jurisdictions.
The retail world will undoubtedly be keeping an eye on the Court this summer. Until then, those with an e-commerce channel must prepare for imminent changes.
Charles Maniace is the director of regulatory analysis at Sovos, a tax compliance and business-to-government reporting software.
Related story: The Supreme Court Takes on Online Sales Tax
Charles Maniace is the director of regulatory analysis at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15-year career in tax and regulatory automation, Chuck has provided analysis to the WSJ, NBC, Bloomberg and more.