The Supreme Court cleared the way Thursday for state and local governments to collect new sales taxes from online retailers and others with substantial sales into a state. The ruling in the South Dakota v. Wayfair case opens the door for states to require out-of-state online retailers and other remote sellers to collect sales tax from their customers, overturning a prior court decision that states have fought for years and that the court upheld in 1992's Quill case.
In 1992, the court ruled in Quill Corporation v. North Dakota that businesses could not be required to collect sales tax unless they have a substantial or physical connection to the state. That decision enabled the growth of online retail by letting companies sell nationwide without collecting sales tax if they had no physical presence in a state.
South Dakota’s sales tax law requires a company that had more than $100,000 of sales or more than 200 transactions in the state in the prior year to collect and remit sales tax on all taxable sales. The new opinion overruled Quill’s physical presence test and now allows states to use economic nexus rules to impose collection responsibility.
Every retailer and online business must now review its responsibility to charge and collect sales tax in all states.
Currently there are 16 states with economic nexus in place and more taking effect shortly. Prior year sales thresholds range from $500,000 down to as low as $10,000. We can expect m ore states to expand their “doing business” laws to align with the South Dakota v. Wayfair opinion, with significant activity in the next round of state legislative sessions.
Although there are still problems facing these “economic nexus” rules, it is now the law of the land. The Court suggested that Congress could address any remaining problems. Although Congress has not been able to address the issue in the past, the South Dakota v. Wayfair decision may provide the necessary motivation.
For more information, please contact Chris Colyer, CPA/PFS at email@example.com or 973-577-2840.