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Sales Tax Authority on Supreme Court’s Wayfair Decision

For roughly 200 years, the U.S. Supreme Court has resolved disputes arising from companies selling products across state borders.

A notable case occurred in 1992 when the state of North Dakota sued Quill Corp., an office-supply firm, which sold products via its catalog 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 presence in the state, such as an office or a warehouse.

The practice of companies selling products across state borders exploded several years after Quill with the rise of ecommerce. (Amazon launched in 1994, for example.) Ecommerce companies sold items that traditionally came from local, tax-paying retailers. But few of the ecommerce firms had a physical presence in a particular state. Thus, under Quill, those firms did not pay sales taxes. States and municipalities that historically relied on that revenue to fund services — police, fire, ambulance — were squeezed.

States tried to respond, in part, by expanding the definition of “physical presence.” Employees, contractors, affiliates (as in affiliate marketing), cookies, hosting relationships — all eventually were a “physical presence” for one or more states.

The result was a bewildering mishmash of state laws, which generated even more disputes and more (lower) court cases.

By 2017, the state of South Dakota formally responded. It passed a law that relied on an “economic nexus,” not a physical one, to assign sales tax collection responsibility. If a company sold products to South Dakota residents, the law asserted, that company had to collect and remit sales taxes regardless of its location. It intentionally violated Quill.

The new law affected, likely, hundreds of ecommerce companies. Most ignored the law. South Dakota eventually sued three of them: Wayfair, Overstock, and Newegg. Lower courts ruled in favor of the ecommerce firms, 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 depend on a physical presence.

There’s no better observer than Shane Ratigan to explain last week’s decision and its impact on ecommerce merchants. He is senior manager, state and local tax for Clark Nuber, a Seattle-based accounting and consulting firm. He’s a longtime nationwide authority on online sales tax matters.

I spoke with Ratigan earlier this week.

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