On April 17, 2018, while many taxpayers scramble to meet the deadline for filing their federal income tax returns, the U.S. Supreme Court will hear oral arguments in South Dakota v. Wayfair, Inc., a case that could forever alter the way in which state sales taxes are collected by remote retailers. The battle that is being waged between states and internet retailers is whether the Supreme Court will allow a state to impose a sales tax collection obligation on businesses with 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 prevents a state from imposing an obligation to collect sales taxes where the retailer has no physical presence in the state. The physical presence rule, articulated in the case of Quill Corp. v. North Dakota, allows companies to control which states they will be obligated to collect taxes by choosing where they own property, rent offices, or send 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 obligation to collect the sales tax. In order to protect their sales tax revenues, South Dakota, like many other states, passed an economic nexus law that requires businesses to collect its sales tax on sales to customers in the state if they have a certain level of economic activity in the state. However, these laws will only become effective if the Supreme Court overturns the physical presence standard set in Quill. If the Supreme Court abandons the physical presence requirement, businesses could be required to collect and remit sales taxes for as many as 46 different states. Businesses that sell goods or services to customers in different states should be prepared to review their obligations to collect sales taxes in light of the Court’s decision in this case which is expected to be decided by the end of the Supreme Court’s current term in June.
By: John F. Hayes, Esq., former general counsel to the New Hampshire Department of Revenue Administration.