On June 21, 2018 the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. creating a paradigm shift in the way in which state sales taxes will be collected by remote retailers. In a 5-4 decision, in a majority opinion written by Justice Anthony Kennedy, the Court overruled the physical presence rule which prevented a state from imposing an obligation to collect sales taxes where the retailer has no physical presence in the state. In the era of mail-order catalogs, the Supreme Court established the physical presence rule under the Commerce Clause of the U.S. Constitution which prevented a state from imposing an obligation to collect sales taxes where the retailer had no physical presence in the state. The physical presence rule, articulated in the case of Quill Corp. v. North Dakota, allowed companies to control which states they were obligated to collect taxes by choosing where they owned property, rented offices, or sent their employees. With the rise of e-commerce, sales through internet retailers grew and states saw their sales tax revenues decline because an increasingly larger proportion of retail sales were from retailers with no physical presence in the taxing state and therefore no obligation to collect the sales tax.
In its decision, the Supreme Court abandoned the physical presence requirement finding it was unsound, that it created market distortions, and that it imposed an arbitrary formalistic approach rather than a case by case analysis. Businesses that sell goods or services to customers in different states should review their obligations to collect sales taxes in light of the Court’s decision in this case. Before the Court’s ruling, the analysis a business would undertake focused on the activities of the company under a standard applicable in all states. After the ruling, unless Congress acts to address the issue, the laws of each state will have to be examined in order to determine if the activities of a company in that state give rise to an obligation to collect a sales tax.
By: John F. Hayes, Esq., former general counsel to the New Hampshire Department of Revenue Administration.