Supreme Court Rethinks Sales Tax Nexus

In a game changing decision, the Supreme Court ruled today, June 21, 2018, that sellers of taxable goods and services can be required to collect and remit sales tax to states where they have no physical presence, commonly referred to as “nexus”.  Since the explosion of internet sales, sales tax applicability has been a complex issue for both states and retailers.  States have been exploring ways to recapture what is reported to be tens of billions of dollars in lost revenue attributed to online sales made to consumers inside states where online merchants have no nexus and no sales tax obligation. [1]

Historically sales tax nexus necessitated some sort of connection or presence within a state – a warehouse, a salesman, or a distribution center.  Today’s ruling changes this evaluation by overturning a longstanding precedent, Quill Corp. v. North Dakota, 504 U. S. 298, that declared the imposition of sales tax without a substantial connection to the state unconstitutional.  Today’s ruling essentially eliminates the nexus requirement by stating, “this Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State. [2]”  In speaking for the majority, Justice Kennedy wrote that previous precedence imposed “a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state's consumers. [3]"  The opinion declared that:

Stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power….The Internet revolution has made Quill’s original error all the more egregious and harmful. The Quill Court did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes, leading the South Dakota Legislature to declare an emergency. The argument, moreover, that the physical presence rule is clear and easy to apply is unsound, as attempts to apply the physical presence rule to online retail sales have proved unworkable. [4]

What does this mean for online retailers?  States have essentially been given a green light to regulate online sales made to consumers within their jurisdiction.  But the question remains as to whether this opens the door to additional corporate and local taxation. Will this decision be interpreted broadly to subject non-resident merchants to local business taxation requirements already imposed on their brick and mortar counterparts?  The potential reach of this decision is broad. 

Sales tax registration requirements already vary on a state-by-state basis, making compliance a daunting task for online sellers and retailers alike.  As the legislators move towards expansion of taxation, LicenseLogix is closely tracking the changes.  Our Account Services team is exceptionally familiar each state’s sales tax registration process and can execute these submissions in high volume.  We can even provide same day sales tax registration.  We are also tracking what today’s decision means in terms of other license requirements such as Foreign Qualify , local business licensure, and beyond.  For an evaluation of your sales tax registration needs, give LicenseLogix a call or request a quote online.   

[1] Supreme Court Clears Way For Sales Taxes on Internet Merchants

[2] South Dakota v. Wayfair, Inc.

[3] South Dakota v. Wayfair, Inc.

[4] South Dakota v. Wayfair, Inc.