For nearly 200 years, the United States Supreme Court has settled disputes arising from the sale of products by companies located abroad. Conflicts are often focused on the preservation of interstate commerce and the ability of a state to govern itself.
A notable case occurred in 1992 when the state of North Dakota brought a lawsuit against Quill Corp., an office supply company that sold products through its catalog to residents North Dakota without paying sales taxes. In Quill Corp. c. North Dakota the court ruled that Quill only had to pay taxes if she had a physical presence in the state, such as an office or warehouse.
The practice of companies selling products beyond the borders of states exploded several years after Quill with the rise of electronic commerce. (Amazon launched in 1994, for example.) States and municipalities that historically relied on sales tax revenues to fund services – police, fire, ambulance – were in a hurry. E-commerce companies sold products that traditionally came from taxed local retailers. But few e-commerce companies had a physical presence in a particular state. Thus, according to Quill these companies did not pay sales taxes.
States have attempted to respond, in part, by expanding the definition of "physical presence". Employees, contractors, affiliates (as in affiliate marketing), cookies, hosting relationships – all ultimately constituted a "physical presence" for one or more states
The result was a disconcerting hodgepodge of state laws, which in turn spawned disputes and other (inferior) affairs.
In 2017, the state of South Dakota formally responded. It enacted a law – in direct violation of Quill – that relied on an "economic link", not a physical one, to assign responsibility for the collection of the sales tax. If a company sold products to residents of South Dakota, the law stated that the company had to collect and remit sales taxes, regardless of location or presence.
This has probably affected hundreds of e-commerce companies. Most ignored the law. South Dakota finally sued three of them: Wayfair, Overstock and Newegg. The lower courts ruled in favor of e-commerce companies, citing Quill . South Dakota appealed to the Supreme Court. Last week, June 21, South Dakota c. Wayfair Inc. (PDF) The Court made its decision.
In a 5-4 vote, he overthrew Quill . The collection and remittance of sales taxes online no longer depend on a physical presence.
There is no better observer than Shane Ratigan to explain last week's decision and its impact on e-commerce traders. He is Senior Director, National and Local Tax for Clark Nuber, a Seattle-based consulting and accounting firm. He is a long-time national authority on online sales tax issues.
I spoke to Ratigan earlier this week. What follows is our entire audio conversation and a transcription of it, condensed for length and clarity.
Practical E-Commerce: Tell us about the decision.
Shane Ratigan: The Case Wayfair was very deliberate. The state of South Dakota has deliberately passed a law in violation of what, at the time, was a precedent of the Supreme Court. The state sent this test balloon, if you will, partly in response to a language that Judge Kennedy [Anthony] had inserted in a sales tax case a few years ago.
Judge Kennedy took the opportunity to invite the legal community to propose to the Supreme Court to re-hear and redefine what was the standard of physical presence in Quill . The state of South Dakota has taken the opportunity to create a law specifically designed to speed up the judicial process.
The state lost at every turn, which, ironically, is exactly what it wanted. They knew that they had passed a law that violated Quill . For plaintiffs, the state has identified three online providers, Wayfair, Overstock and Newegg.
There was probably no surprise on either side. South Dakota passed this law knowingly and understood that it was contrary to the precedent of the Supreme Court. I guess the defendants were at least given an opinion. The desire for some clarity about what the future would look like was held by both states in the regulated community [merchants].
PEC: What did the South Dakota Act contain?
Ratigan: The heart of the law is to change the way states determine who is required to collect their sales tax. In order for a state to require a foreign supplier to collect its sales taxes, it had to prove or assert that the out-of-state supplier had some sort of physical presence in the taxing state.
In Quill the judges thought that they were drawing a line in the sand to get to this physical presence test. The states got to work, almost immediately, trying to shoot and shoot and massage this concept of physical presence to gain more collectors.
It created a great deal of diversity among states to determine what constituted a link-creating activity, which enabled companies to operate in a way that avoided the need for collection.
Now under Wayfair the analysis is simpler. That's the amount of revenue that is derived in this state by this remote salesman. Your link is now triggered as a remote seller if you reach the threshold – $ 100,000 in annual sales or 200 annual transactions.
PEC: What is the immediate impact for the country's traders?
Ratigan: This year, if you are going to sell more than $ 100,000 in South Dakota, or you are going to have more than 200 transactions, it's time to act.
Of all states with sales taxes, only 16 or 17 of them have enacted similar laws in South Dakota. The states are all watching what happens. Some of the laws are written with a date of entry into force when and if the Supreme Court annuls Quill .
It's easy to have the impression that from tomorrow, all states will collect. This is not true.
PEC: You mentioned that the court used the South Dakota law as a model. What aspects of the law do you speak about?
Ratigan: They reviewed the South Dakota law, and they said that it meets three key requirements.
The first is what the court calls the exemption for small sellers. If you sell less than $ 100,000 a year in South Dakota or do not make 200 annual sales transactions, that does not change anything for you.
Second, the South Dakota law is not retroactive. The state can not say, for example, that you had $ 100,000 in sales in 2015, we will check you for 2015 since you should have collected. The law excludes it.
The third thing the court appreciated about the law, is that South Dakota is a member of the board of directors of the streamlining of sales tax. The streamlined sales tax project is a voluntary group of states – 23 of them – with a sales tax. Over the years, they have met and tried to standardize some of the more difficult elements of sales tax compliance.
PEC: The exemption for small seller, is it a permanent exemption?
Ratigan: Yes, but the exceptions in Wayfair refer only to these thresholds to the seller's obligation to collect the tax. Nothing in Wayfair eliminates or alters the consumer's obligation to remit use tax on anything he buys.
Judge Kennedy refers to it in the decision. He said that the user fee paid by the consumer is probably the most avoided tax in the history of the world.
PEC: So, if I live in South Dakota and buy a couch online from a small vendor who is under the threshold, under the new law, I am always responsible for paying the tax on this couch.
Ratigan: Yes. The decision does not affect the imposition of a given transaction. This only affects those who are obliged to collect it and pay it.
PEC: In the light of Wayfair do you anticipate an answer from Congress?
Ratigan: The US Congress of the last 25 or 30 years has not been able to solve big problems. In addition, the Fair Market Act and the Parity of Distance Transactions Act both establish a threshold, an exemption for small sellers and prevent states from retroactively applying the rules. None of them became law. The South Dakota law is very similar to these.
I do not see how Congress overturned the decision Wayfair .
PEC: Nothing else?
Ratigan: Keep in mind that Wayfair does not change the past. If you are a business that has a physical presence in a state for years, you still have to deal with those past times.
The precedent Quill was the law until June 21, 2018. We will see how aggressive the states are in looking at past periods. I do not think they will be less aggressive than they are now. If a state can say that your company had a presence Quill in an earlier period, you could be in the hot seat.
PEC: What about pending cases involving, say, a physical presence?
Ratigan: States have no interest in giving up these cases, I do not think unless they decide not to spend the money to prosecute them