U.S. Supreme Court Overruled Quill’s Physical Presence Requirement
Author: Iris Chang, Tax Supervisor
The United States Supreme Court has ruled in favor that states are allowed to collect sales tax from online retailers, even if companies don’t have a physical presence in the state, in the South Dakota v. Wayfair decision, on June 21, 2018. On Thursday, the Supreme Court overruled Quill Corporation v. North Dakota, 1992, which stated that the Constitution bars states from requiring businesses to collect sales taxes unless they have a substantial connection to the state.
The Supreme Court decided that only businesses with a physical presence had to add sales tax to purchases. North Dakota’s tax commissioner attempted to get Quill Corporation, an office supply retailer, to pay taxes on its businesses in the state. However, because Quill had no physical presence or any workers living in North Dakota, and was instead doing business through out-of-state mail orders and phone orders, the Supreme Court ruled that the business could avoid the local taxes. Subsequently, businesses have relied on the case as a legal defense for not collecting taxes in states where they were not physically located.
The internet’s prevalence and power have changed the dynamics of the national economy, and states are losing massive sales tax revenues vital to education, health care and infrastructure. Justice Anthony M. Kennedy, wrote that dramatic technological changes had made the court’s previous ruling obsolete, and that it unfairly disadvantaged traditional brick and mortar stores.
The Supreme Court ruled that internet retailers can be required to collect sales taxes in states where they have no physical presence, and granted certiorari in South Dakota v. Wayfair, et al., the lead case challenging the court’s “physical presence” nexus rule announced in National Bellas Hess v. Illinois, and reaffirmed in Quill Corporation v. North Dakota.
South Dakota responded to Justice Kennedy’s invitation by enacting a law that required all merchants to collect a 4.5 percent sales tax if they: (1) make over $100,000 in gross revenue from sales of tangible personal property or services delivered to South Dakota; or (2) complete 200 or more separate transactions for delivery to South Dakota. State officials cited three large online retailers, Wayfair, Overstock.com and Newegg, for violating the law.
Regardless of the Supreme Court’s decision in South Dakota v. Wayfair, the decision will directly impact similar “kill-Quill” laws (for example, Indiana, Wyoming) and regulations (for example, Alabama). What is unclear though, is what impact the court’s decision will have on other state efforts to distinguish Quill, rather than directly overruling it. Taxpayers and state revenue departments are optimistic that the court’s decision in South Dakota v. Wayfair will provide much needed clarity regarding the constitutional limits on state taxing authority. But no such clarity is guaranteed and questions remain on the scope and reach of the physical presence rule. Congress may now decide to move ahead with legislation on this issue to provide a national standard for online sales and use tax collection that would make the sales tax a business obligation rather than a consumer obligation. Under that proposal, sales tax would be collected based on the tax rate where the company is located, but would be remitted to the jurisdiction where the customer is located. The AICPA has submitted comments on the Marketplace Fairness Act, noting some concerns and suggested improvements if Congress decides to proceed with such a bill. Taxpayers should closely monitor this and new state efforts to enforce their sales and use tax laws in the future.
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