Over the last year, there has been a tremendous amount of chatter among the sales tax cognoscenti about the case South Dakota v. Wayfair, which the U.S. Supreme Court is poised to publish its ruling on soon. Indeed, on this blog alone since January you can find several original posts, including on what the case is about, predictions of how states will react, how to read the appellant’s Court briefs, a webcast on the case, our immediate response to the oral arguments, and a more nuanced review of the Justices’ questions.
Regardless of how the Court rules, the potential consequences for eCommerce retailers could be profound.
If South Dakota prevails, then the current standards for what establishes a sales tax obligation would be overturned; every state would be able to require online sellers to collect sales tax on all of their sales, regardless of where the online seller is based. Depending on how broadly the Court would write such an opinion, there could be almost no constraints on how or when states could impose those requirements.
But — and this is not something widely talked about in the current Wayfair scuttlebutt — even if the Court rules for Wayfair by affirming the Quill doctrine and ruling that the South Dakota law violates Quill, there’s every reason to expect states to continue to stretch the limits of Quill in their efforts to bring in more tax revenue. These efforts would include such policies like “click-through” nexus first enacted by New York; “cookie” nexus, which Massachusetts passed last year; and the “notice-and-reporting’ requirements spearheaded by Colorado.
In a post on our main Sovos feed, we delve deeply into what these policies look like and why they would become more popular in the case of a win for Wayfair at the Supreme Court. We highly recommend that anyone interested in these details should read the full blog here.
If, instead, you are more interested in ongoing issues that are more specifically affecting eCommerce sellers (as opposed to the entire world of sales tax regulation), read on.
How are eCommerce retailers currently handling state sales tax?
At the heart of Wayfair is how states can collect tax revenue on eCommerce. Currently, many of the biggest e-retailers, such as Amazon, have already committed to collecting sales tax on all their sales — but only for sales they personally fulfill. Within Amazon, though, there is a huge trove of sales (nearly half of those made through Amazon.com) that are not fulfilled by Amazon, but that are instead made by a third-party marketplace seller. Most of these sales are still going through without sales tax being collected.
As such, many states are working to force marketplace providers like Amazon to collect sales tax on every sale that moves through its system, including from third-party sellers. Pennsylvania recently passed such a law, following Washington state’s lead. Other states, like Massachusetts and Rhode Island, are instead demanding Amazon provide them data on sales made through its marketplace, likely in an effort to assess where they could look for additional tax income. In theory, if states could compel Amazon, and other similar operations, to fill in the tax gap from their marketplace sellers, that could resolve a lot of the conflict, leading them to back off of other efforts like passing economic nexus bills.
Ultimately, the $20 billion question is, what will Congress do? Under the doctrine that established the physical presence nexus standard (the Commerce Clause), Congress could at any point step in and dictate what states can do regarding taxing remote sellers. It has the power to declare whatever standard for nexus it deems appropriate and can establish specific rules that the Court cannot, such as the proper threshold of sales before a state can require collection of sales tax, whether states can impose retroactive sales tax obligations, and even whether there should be a universal tax rate for remote sales.
Just because there are many compelling reasons why physical presence nexus is no longer applicable in the age of eCommerce, does not at all mean that the Supreme Court will rule to overturn it. But were that to happen, with the Court reaffirming the Quill rules, there are many other ways that states will continue to pick at the edges and expand their sales tax collections.
When the Court does issue its ruling on Quill, you can be assured that we will thoroughly review what it decided and how it will affect your business. We encourage you to stay tuned for these future developments.
Make sure to attend our live interview with regulatory experts Chuck Maniace and Alex Koral, tentatively scheduled for June 27 at 2:00 p.m. ET, to get your questions on the Wayfair v. South Dakota verdict answered.