New U. S. Supreme Court Ruling Changes the Landscape for State Sales and Use Tax
On June 21st, the U. S. Supreme Court ruled in favor of South Dakota in South Dakota v. Wayfair (U.S. S. Ct. Dkt. No. 17-494). Under the South Dakota law (S.B.106), out-of-state sellers would be liable for collecting sales tax from South Dakota customers if the seller’s annual gross revenue for personal property, electronically transferred products (i.e. phone apps), or services delivered in South Dakota exceed $100,000, or the seller engages in 200 or more separate transactions for the delivery of goods or services into the state. The case was sent back to the South Dakota Supreme Court for further proceedings regarding the remaining aspects of the law.
The decision overrules prior Court decisions limiting states from imposing sales and use tax on sellers unless they had a physical presence in that state. Physical presence includes the presence of people (employees, agents, independent sales staff), and property (whether owned or leased). The U. S. Supreme Court decision also questioned the validity of the physical presence test when applied to the virtual marketplace of today’s economy, and even stated that it created a competitive advantage and tax shelter for online businesses selling to consumers in states in which that business had no physical presence. The court decision stated that an economic link, if significant, was enough to warrant states to collect sales and use tax from a seller.
Those who will be most impacted by the decision are businesses with significant online sales. Many businesses sell products across the country without having any physical presence outside of their operating state. Due to the billions of lost sales tax revenues, for the last few years, states have been implementing various laws to try to force online sellers into paying sales and use tax, whether by implementing a law similar to South Dakota (S.B. 106), by attempting to have the consumers pay the tax directly to the government, or by trying to link a direct or indirect physical presence to an online seller. This court decision establishes a clear precedent for adopting an economic presence law similar to South Dakota (S.B. 106). Currently, 20 states have adopted a law focusing on an economic presence, with more certain to come.
Although the U. S. Supreme Court questioned the validity of utilizing a physical presence test when connecting a seller to a state, it should be noted that South Dakota law (S.B. 106), as well as all of the other state laws, still include a physical presence test, but the decision in South Dakota v. Wayfair also now allows each state to tax sales from sellers that do not have a physical presence within their state. If the physical presence test is thrown out by the courts in the future, then the states’ laws will have to reflect those changes. Interstate income tax laws would also be impacted and would force more states to adopt laws focused on economic links (many already do). If not overturned, states may take the South Dakota v. Wayfair decision a step further and be more aggressive in passing laws focused on economic links. With a multitude of allowable laws, we could be put in a position similar to interstate income tax where a seller can be faced with a sale that falls under the taxing authority of a multitude of states. Only the U. S. Congress has the authority to establish clear laws outlining interstate commerce, and only they could establish a clear set of standards; otherwise, courts have to determine the validity of each state law passed as it pertains to the current broad U. S. interstate commerce law.
Due to the decision in South Dakota v. Wayfair, the tides of state sales and use tax, and perhaps even state income tax, are definitely changing. Such significant changes bring not only the challenges of additional reporting and tax liability, but also opportunities in planning. We strongly encourage you to contact your local Kemper CPA Group LLP tax advisor to help you navigate these uncertain waters.