The Era of Requiring a Nexus to the State is Over
Legal Definitions for Sellers
A. Granting Certiorari – When the Supreme Court agrees to hear a case from lower courts. The United States Supreme Court chooses what cases it will hear and refuses to hear most cases presented to it. Generally, the United States Supreme Court will hear cases and decide issues where the various Circuit Courts around the country have issued decisions that are in conflict with each other or whether it’s a matter pertaining to the nation as a whole.
B. Commerce Clause – A part of the Constitution that gives Congress the power to pass laws that have an effect on economic activity between States.
C. Dormant Commerce Clause – Understood as restrictions on States in regulating interstate commerce.
D. Injunction – An order from the court that requires a party to act a certain way or stop acting in a certain way. It is in order to either do something or to stop doing something.
E. Motion for Summary Judgement – a motion is how a litigant asks a court to do something. You must specifically ask the court to issue an order. A motion for summary judgment is where one party is asking the court to take all the information provided at that point in time and decide whether or not to allow the case to continue.
F. Jurisprudence – The pattern of how a court may rule on particular issues.
G. Holding – What the court says is the law regarding the issue(s) in the case.
H. Common Carrier – A person or company that transports goods on regular routes at set rates.
I. Chilling Effect – Where an event causes multiple parties to stop acting a certain way.
Summary of the Case
The US Supreme Court’s ruling in South Dakota v. Wayfair changed the landscape of internet sales by overruling a decades-long precedent of tax liability for out of state sellers. [1]
Sellers can be held responsible for collecting and providing sales taxes regardless of where the Seller is located. [2]
Sellers can be held responsible for collecting and providing sales taxes regardless of where their goods were located prior to delivery.
The era of a “nexus” between the goods and the individual states is over.
South Dakota’s legislature passed a law requiring out of state online sellers to collect sales tax and give it to the State. [3] The State did this because previous Supreme Court decisions, Quill v. North Dakota and National Bellas Hess, Inc. v. Dept. of Revenue of State of Illinois, previously ruled that unless sellers maintained a physical presence or a “nexus” with the state, a sales tax burden was unconstitutional. [4] Online sellers did not have to collect sales tax except in their home state or where they stored their goods. The responsibility for sales taxes was placed onto the in-state purchaser… which was rarely, if ever paid.
South Dakota’s legislature estimated a loss of sales tax revenue in the tens of millions of dollars. Since South Dakota does not collect an income tax, the state government believed that taxing out of state sellers would provide money for state spending.
Procedural History
This lawsuit began after the South Dakota law was passed. Then, South Dakota required judicial review of the law before it could take full effect.
The state of South Dakota filed an action against Wayfair and other out of state sellers in state court seeking a “declaration that the requirements of the Act are valid and applicable to respondent and an injunction requiring (defendants) to register for licenses to collect and remit sales tax.” [5]
Wayfair and the other defendants filed a motion for summary judgement asking that the case be thrown out. Wayfair argued the existing law at the time: that the Act was unconstitutional under the US Constitution’s Commerce Clause.
South Dakota argued that despite the Act’s inability to survive prior requirements, the economic necessity to the state outweighed previous decisions on out of state sellers’ tax obligations. At first, South Dakota lost. Then, South Dakota appealed and lost again.
The state of South Dakota asked the Supreme Court of the United States granted certiorari. [6]
History of the Legal Rule
The law that was overruled was discussed at length in the Wayfair decision. It began with the mail order business and changed over time. [7] Early 1800’s cases like Gibbons v. Ogden and Willson v. Black-Bird Creek Marsh Co. set the stage for the Supreme Court’s ability to interpret the Commerce Clause as well as states’ abilities to pass laws that may affect interstate commerce. [8]
The cases before Wayfair changed and evolved over time into a two-fold test for proposed state sales tax laws:
· First, the state law could not discriminate against interstate commerce.
· Second, states could not impose undue burdens on interstate commerce. [9]
What is the Law Now?
The Supreme Court of the United States held that the South Dakota’ statute did not violate the Commerce Clause and was thus not unconstitutional. In doing so, the Supreme Court overruled the important holdings for online sellers from the old cases.
Specifically, a physical presence in a state is no longer a threshold for the nexus requirement. [10] The Court briefly discusses the other factors, however declines to issue a ruling regarding them as those were not before the Court. [11]
The previous cases were overruled on the logic that Quill had in fact been wrong from the time of its decision. [12] The Commerce Clause gives Congress the power to “regulate commerce with foreign nations, and among the several states.” [13]
The Supreme Court began its analysis with an explanation of the power it has to review these disputes, rather than leaving the issue to Congress. [14] The Court explained that since this problem was created by the Court, it is the Court’s responsibility to resolve it. [15] It was these problems that forced states to make laws similar to South Dakota’s. [16] The Court said application of the physical presence rule was difficult in modern times. Cookies, apps, and other internet-based complexities undermine the blanket application of the rule. [17]
In sum, the Court’s reasoning rested on determining the old case’s decision was invalid from the start and that numerous economic problems for local sellers and States required the Court to fix its previous mistakes. Online sellers beware.
Impracticality, Increased Cost & Returning Sales Tax
The Supreme Court has always been concerned with the practical realities businesses have to face in tax collection. However, in Wayfair it reverses course and deems small businesses capable of keeping track of thousands of tax jurisdictions in the United States.
There are just under 10,000 sales tax jurisdictions in the United States. [18] Under the new law from Wayfair, an online retailer with no connection to a state, other than selling an item to a resident, will be liable for collecting sales tax in every jurisdiction purchasers are located.
In Texas alone, there are over 1,500 separate tax jurisdictions. [19] This requirement is impractical for most online sellers. Sophisticated software is employed by large corporations to keep track of tax data, however online sellers who do not have billions in assets are left at a loss.
Sellers have to contemplate the considerable increase in customer relations costs should there be an issue with a sale. Businesses will likely need to hire more customer service personnel or staff to deal with issues arising in multiple states. Most states have double digit tax jurisdictions, and as such require a large amount of attention that one person may have difficulty keeping complete account of. This adds overhead to businesses that may already be at their limit for the amount of sales they do.
Remitting the sales tax to each individual jurisdiction may also pose a problem for businesses due to the sheer number that exist. For example, Missouri has over 1,000 separate tax jurisdictions and depending on where the buyer is, numerous, unique remittance procedures may apply.
Possible Laws States May Pass
There is no guarantee that states will take a similar approach to taxation as South Dakota. The South Dakota statute in Wayfair “applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State.” [20] Some states may tax all sales to their residents.
Each State has a different tax scheme to generate revenue. For example, Montana has no sales tax, neither does Delaware, Oregon, or New Hampshire. [21] Each of those States must tax differently because of that. By extension, each State will likely arrive at a different legislative “solution” to any tax issues.
The Wayfair decision ultimately gives each State the power to tax out-of-state sellers in whatever fashion they deem necessary.
This may include giving each local tax jurisdiction the power to impose additional taxes on top of the State out of state seller statutes. In this scenario, not only would sellers have to mind forty-six different State-by-State sales tax rates, but potentially hundreds, if not thousands of sub-State level taxes as well.
The enormous costs associated with either the physical labor of keeping track, or the complex and costly software is enough to deter those from starting a digital business and deter businesses from selling in what may previously been their most profitable state.
Many Internet Sellers May Not be Subjected to Sales Tax
A large concern for many internet sellers is that they will all be forced to calculate and send back sales tax in different amounts for each tax jurisdiction. This may appear to be a disastrous effect of Wayfair. However, this will hardly affect many sellers, or even a majority.
In fact, Wayfair ended with South Dakota being able to tax out-of-state internet sellers if they maintained the level of contact specified in its statute. Notably, the statute requires that there be annually either $100,000 in sales or 200 separate sales. [22] In regard to South Dakota, very few independent internet sellers will reach this amount.
Larger retailers like Wayfair, Newegg, or Overstock may reach this amount, but it is very likely that the vast majority of internet sellers will fly under the radar and be able to continue to sell without having the sales necessary to be taxed by South Dakota.
Alabama currently requires out of state sellers to make $250,000 per year in sales, [23] New York requires sales tax to be collected if the internet seller has an agreement with an in-state party to pay for customer referrals and sales to New York customers exceeds $10,000 in the preceding year, [24] and Florida requires direct solicitation to the state. [25] While it may be possible for larger retailers to fulfill these requirements, it is not likely that the smaller retailers will.
Taxing Out-of-State Sellers – Conclusion
In sum, the decision in Wayfair is certainly a new advancement in the realm of taxing out-of-state sellers. While there can be plenty of criticisms directed at the decision and how it was reached, it cannot be forgotten that this is now settled law and precedent, just as Quill was before it.
As each state passes its own sales tax laws, sellers will have to adjust.
[1] S. Dakota v. Wayfair, Inc., No. 17-494, 2018 WL 3058015, (U.S. June 21, 2018)
[2] S. Dakota v. Wayfair, Inc., No. 17-494, 2018 WL 3058015, (U.S. June 21, 2018)
[3] Id. at 6.
[4] Id.
[5] Id., at 7.
[6] Id.
[7] Id. at 7.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Wayfair, Inc., No. 17-494, 2018 WL 3058015, *14 (noting that Quill was incorrect in 1992 and the advent of the internet and its impact on commerce and the economy only made the error more harmful and noticeable).
[13] U.S. Const. art. I § 8.
[14] Wayfair, Inc., No. 17-494, 2018 WL 3058015, *7.
[15] Id. at *14.
[16] Id. at *14.
[17] Wayfair, Inc., No. 17-494, 2018 WL 3058015, *15.
[18] Joseph Bishop-Henchman, State Sales Tax Jurisdictions Approach 10,000, Tax Foundation (Mar. 24, 2014) https://taxfoundation.org/state-sales-tax-jurisdictions-approach-10000/.
[19] Id.
[20] Wayfair, Inc., No. 17-494, 2018 WL 3058015, *5.
[21] Joseph Bishop-Henchman, State Sales Tax Jurisdictions Approach 10,000, Tax Foundation (Mar. 24, 2014) https://taxfoundation.org/state-sales-tax-jurisdictions-approach-10000/.
[22] Id.
[23] David M. Steingold, Alabama Internet Sales Tax, Nolo (last viewed July 2, 2018), https://www.nolo.com/legal-encyclopedia/alabama-internet-sales-tax.html.
[24] David M. Steingold, New York Internet Sales Tax, Nolo (last viewed July 2, 2018), https://www.nolo.com/legal-encyclopedia/new-york-internet-sales-tax.html.
[25] David M. Steingold, Florida Internet Sales Tax, Nolo (last viewed July 2, 2018), https://www.nolo.com/legal-encyclopedia/florida-internet-sales-tax.html.