A notable case occurred in 1992 when the state of North Dakota sued Quill Corp., an office-supply firm, which sold products through its catalogue to North Dakota residents without paying state sales taxes. In Quill Corp. vs. North Dakota, the Court ruled that Quill had to pay the taxes only if it had a physical existence in the state, like an office or a warehouse.
The custom of businesses selling products across state boundaries exploded several years following Quill with the development of ecommerce. (Amazon launched in 1994, for instance ) Ecommerce companies sold things that came from local, tax-paying retailers. But few of those ecommerce companies had a physical presence in a specific state. Thus, under Quill, those companies did not pay taxes. States and municipalities that historically relied on that revenue to fund services — police, fire, ambulance — were squeezed.
States attempted to respond, in part, by expanding the definition of”physical presence” Employees, contractors, affiliates (as in affiliate marketing), biscuits, hosting associations — all eventually were a”physical presence” for one or more nations.
The end result was a bewildering mishmash of state legislation, which generated even more disputes and much more (lower) court cases.
By 2017, the state of South Dakota formally responded. It passed a law which relied on an”economic nexus,” not a physical one, to assign sales tax collection duty. If a company sold products to South Dakota residents, the legislation claimed, that firm had to collect and remit sales taxes no matter its location. It blatantly violated Quill.
The law affected, probably, hundreds of ecommerce businesses. Most ignored the law. South Dakota finally sued three of these: Wayfair, Overstock, and Newegg. Lower courts ruled in favor of the ecommerce companies, citing Quill. South Dakota appealed to the Supreme Court. Last week, on June 21, in South Dakota vs. Wayfair Inc.. (PDF), the Court issued its decision.
In a 5-4 vote, it overturned Quill. The collection and remittance of sales taxes no longer rely on a tangible presence.
There is no better audience than Shane Ratigan to describe last week’s decision and its effect on ecommerce merchants. He’s senior manager, local and state taxation for Clark Nuber, a Seattle-based accounting and consulting firm. He is a longtime nationwide authority on internet sales tax issues.
I talked with Ratigan earlier this week. What follows is our whole audio conversation and a transcript of it, condensed for clarity and length.
Practical Ecommerce: Inform us about the decision.
Shane Ratigan: The Wayfair situation was quite deliberate. The state of South Dakota purposely passed laws in breach of what, at the time, was Supreme Court precedent. The state sent this evaluation balloon, if you will, partly in response to a language that Justice [Anthony] Kennedy had added into a sales tax case from a couple of years back.
Justice Kennedy took the opportunity to invite the legal community to think of a suitable case for the Supreme Court to rehear and redecide what was the physical presence standard in Quill. The state of South Dakota took the chance and created legislation which was especially designed to fast track through the courts.
The country lost at every turn, which, ironically, is precisely what it wanted. They knew they’d passed a law which was violative of Quill. For plaintiffs, the state identified three online suppliers, Wayfair, Overstock, and Newegg.
Probably there were no surprises on both sides. South Dakota passed this legislation with complete knowledge and understanding that it was violative of Supreme Court precedent. I’d guess that the defendants were given notice. The urge for some clarity on what the future was going to look like has been held by both the nations from the regulated community [merchants].
PEC: What did the South Dakota law contain?
Ratigan: The crux of this law is it alters the way in which states determine who is obligated to collect their sales tax. For a state to obligate an out of state vendor to collect its earnings, it had to establish or maintain that the out of state vendor had some type of physical presence within the taxing state.
In Quill, the justices believed they were drawing a line in the sand with coming up with this particular physical presence test. The nations went to work, almost instantly, trying to tug and pull and massage the notion of physical existence to acquire more collectors.
It created a great deal of diversity between the states in determining what was a nexus-creating action , which enabled companies to operate in a manner which was specifically designed to prevent the collection obligation.
Now, under Wayfair, the analysis is simpler. It’s how much revenue is derived in this condition by that distant seller. Your nexus is currently triggered as a distant seller if you satisfy the threshold — $100,000 in annual sales or 200 annual transactions.
PEC: What is the instant impact to merchants nationwide?
Ratigan: This season, if you are going to sell more than $100,000 into South Dakota, or you are likely to have more than 200 transactions, it is time to act.
Of all of the states with a sales tax, only about 16 or 17 of them have passed similar legislation to South Dakota. The countries are all watching what is happening. A few of the laws are written with an effective date if the Supreme Court overturns Quill.
It’s easy to get the impression that beginning tomorrow, every state will collect. It’s not correct.
PEC: You said that the court utilized the South Dakota law a version. What aspects of the law are you referring to?
Ratigan: They looked in the South Dakota law, and they stated that it addresses three important requirements.
The first one is what the court calls the little seller exemption. If you are selling less than $100,000 a year to South Dakota or not attaining 200 annual sales transactions, this will not change anything to you.
Secondly, the South Dakota law isn’t retroactive. The state can’t say, as an instance, you had $100,000 in sales in 2015, we are going to audit you for 2015 because you should have been collecting. The law abiding that.
The next thing which the court enjoyed about the legislation was that South Dakota is a part of the Streamlined Sales Tax Governing Board. Streamlined Sales Tax Project is a voluntary group of countries — 23 of them — using a sales tax. Over the years they’ve met and attempted to standardize a few of the more prickly components of sales tax compliance.
PEC: The little seller exemption, is that a permanent exemption?
Ratigan: Yes, but the exemptions in Wayfair simply refer to those thresholds to the responsibility of the vendor to collect the tax. Nothing in Wayfair eliminates or changes the customer’s obligation to remit use tax on whatever they purchase.
Justice Kennedy alludes to this in the choice. He explained that the consumer remitted use tax is probably the most evaded taxation in the history of the planet.
PEC: If I reside in South Dakota and buy a sofa online from a small seller who’s under the threshold, under the new law I am still responsible for paying use tax on that sofa.
Ratigan: Yes. The decision does not affect the taxation of any given transaction. It only affects who is obligated to collect and pay it.
PEC: In light of Wayfair, do you expect a response from Congress?
Ratigan: The U.S. Congress over the past 25 or 30 years has not been great at solving large issues. Additionally, the Marketplace Fairness Act and the Remote Transactions Parity Act both establish a threshold, a small seller exemption, and prevented states from applying the rules . Neither of these became law. The South Dakota law is extremely similar to those.
I simply don’t see Congress undoing the Wayfair choice.
PEC: Anything else?
Ratigan: Remember that Wayfair doesn’t change the past. If you’re a company that has had a physical presence in a state for years, you still need to deal with those previous periods.
The Quill precedent was law before June 21, 2018. We’ll see how competitive the countries are at looking at previous periods. I don’t believe they’ll be any less competitive than they are now. If a state can assert that your company had a Quill existence in a previous period, you may be on the hook.
PEC: What about pending cases involving, say, a physical existence?
Ratigan: The nations have no interest in dropping those instances, I wouldn’t believe, unless they decide not to invest the money to pursue them