Shares of the online retail giants Amazon, Etsy, Overstock, and Wayfair tanked on Thursday after the Supreme Court ruled that states can impose sales on online purchases even if the business doesn’t have a physical presence there. The decision in the case, South Dakota v. Wayfair, reverses a 1992 ruling on Quill Corp. v. North Dakota that said sellers only had to collect state sales taxes if they had a warehouse or office in the state. The Supreme Court on Thursday ruled 5-4 that states can require online sellers to collect sales taxes. Justice Anthony Kennedy wrote the opinion, and Justices Clarence Thomas and Neil Gorsuch each filed concurring opinions. Modern e-commerce “does not align” with the physical presence required in the 1992 decision, Kennedy wrote. Chief Justice John Roberts wrote a dissenting opinion, in which he was joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan. Moving ahead, states will be able to require retailers to collect state sales taxes on their transactions, whether they have a presence in the state or not. It could mean billions of dollars in additional taxes for big and small retailers alike. Currently, Amazon, for example, collects state sales taxes on the products it sells directly, but it doesn’t for third-party sellers except for in Washington and Pennsylvania, where state laws require it to. (We have a short explainer at what was at stake in South Dakota v. Wayfair here.) The decision might be a big hit to online retailers — or at least Wall Street thinks it will be. Bloomberg’s Joe Weisenthal tweeted a screenshot of share prices of Amazon, Etsy, Overstock, and Wayfair diving in the wake of the Supreme Court’s ruling: BREAKING: *STATES CAN REQUIRE INTERNET TAX COLLECTION, SUPREME COURT RULES *AMAZON, OVERSTOCK, ETSY, WAYFAIR DROP TO SESSION LOWShttps://t.co/lZpcffvKG1 pic.twitter.com/ReCuqqqED1 — Joe Weisenthal (@TheStalwart) June 21, 2018 Opponents of the Wayfair decision warned it will actually affect small retailers more than it does the big ones. Of course, those aren’t publicly traded. There’s a lot of cash at stake — not only for the companies involved but also, potentially, for state governments. The Government Accountability Office estimates that state and local governments could have collected up to $13 billion more in 2017 had they been allowed to require sales tax payments from online sellers, as Bloomberg notes. All but five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — impose sales taxes.<doc-sep>Opinion analysis: Court expands states’ ability to require internet retailers to collect sales tax By Mark Walsh at 4:15 pm Justice Kennedy with opinion in South Dakota v. Wayfair Justice Anthony Kennedy had essentially invited a test case to overrule Quill Corp. v. North Dakota and its physical-nexus rule for the states being able to require out-of-state retailers to collect sales tax. So it was not a huge surprise that Kennedy had the opinion for the court today in South Dakota v. Wayfair. Except, of course, that the oral argument in the case in April had left many observers wondering whether the court could get to a majority willing to overrule the 1992 Quill decision and its 1967 predecessor, National Bellas Hess Inc. v. Illinois Department of Revenue. In an unusual voting lineup, the court did reach such a majority, and Kennedy announced that the physical-presence rule was unsound and incorrect, and that Quill and Bellas Hess were overruled. “In effect, Quill has come to serve as 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—something that has become easier and more prevalent as technology has advanced,” Kennedy wrote. “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.” The opinion was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch, with Thomas and Gorsuch writing short concurrences. Chief Justice John Roberts wrote a dissent that was joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan. “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” Roberts said. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” The court was considering whether to overrule precedents that date from eras when out-of-state shopping meant shopping by mail-order catalog. The states have been losing out on billions in sales tax revenue over the years, even as some big internet retailers such as Amazon have begun collecting sales tax regardless of whether they have a physical presence in the buyer’s state. The states, along with some brick-and-mortar retailers and mom-and-pop stores that have been on the losing end of Quill, urged Congress to come to their rescue, but to no result. In a concurrence in a 2015 Colorado case related to state sales and use taxes, Kennedy called for the court to re-examine Bellas Hess and Quill. That prompted South Dakota, which has no state income tax and relies heavily on its sales and use taxes, to pass a new law in 2016. The statute imposes an “economic presence test” on out-of-state retailers to subject them to sales tax liability. The measure applies to any retailer with at least $100,000 in sales or at least 200 individual transactions in the state. South Dakota sued several out-of-state internet retailers, seeking to require them to begin collecting taxes. Three decided to fight — Wayfair, a retailer of home goods; Overstock.com, a general retailer; and Newegg.com, which specializes in tech products. The South Dakota Supreme Court agreed with the retailers that Quill remained the controlling precedent, and that the state could not bypass the physical-presence rule to impose sales taxes on the out-of-state retailers. In his opinion for the court in Wayfair, Kennedy said that the physical-presence rule as defined and enforced in Bellas Hess and Quill “is an extraordinary imposition by the judiciary on states’ authority to collect taxes and perform critical public functions.” He noted that 41 states, two U.S. territories, and the District of Columbia had joined an amicus brief on South Dakota’s side asking the court to reject the Quill test. “That [the physical-presence rule] allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust,” Kennedy said. “It is unfair and unjust to those competitors, both local and out of state, who must remit the tax; to the consumers who pay the tax; and to the states that seek fair enforcement of the sales tax, a tax many states for many years have consid­ered an indispensable source for raising revenue.” He cited marketing materials from Wayfair. “Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘one of the best things about buying through Wayfair is that we do not have to charge sales tax.’ What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.” There is “nothing unfair about re­quiring companies that avail themselves of the states’ benefits to bear an equal share of the burden of tax collec­tion,” Kennedy said. Kennedy discussed at some length the changes to the national economy and retailing brought about by the internet. “The Internet’s prevalence and power have changed the dynamics of the national economy,” he said, noting that mail-order sales in the United States in 1992 totaled some $180 billion, while e-commerce sales last year were estimated to be $453.5 billion. This expansion has increased the revenue shortfall faced by the states, he continued, citing estimates that range from $8 billion to $33 billion. The retailers’ arguments based on reliance interests in the Quill rule were unpersuasive because the physical-presence rule has not been as clear and easy to apply as suggested, Kennedy said. Nationwide sales-tax collection may impose a burden on smaller sellers, he said, but “eventually, software that is available at a reasonable cost may make it easier for small businesses to cope with these problems.” “And in all events, Congress may legislate to ad­dress these problems if it deems it necessary and fit to do so,” Kennedy said. Thomas said in his concurrence that he should have joined Justice Byron White’s dissent in Quill in 1992. Gorsuch’s concurrence said, “My agreement with the court’s discussion of the history of our dormant commerce clause jurisprudence, however, should not be mistaken for agreement with all aspects of the doctrine.” In his dissent, Roberts said he agreed that Bellas Hess was wrongly decided, but he went on to state that the majority’s view that the internet’s prevalence and power have changed the dynamic of the national economy “is the very reason that I oppose discarding the physical-presence rule.” “If stare decisis applied with special force in Quill, it should be an even greater impediment to overruling precedent now, particularly since this Court in Quill tossed the ball into Congress’s court, for acceptance or not as that branch elects,” the chief justice said. Roberts noted that Congress has been considering whether to alter the physical-presence rule, and “nothing in today’s decision precludes Congress from continuing to seek a legislative solution. But by suddenly changing the ground rules, the Court may have waylaid Congress’s consideration of the issue.” The majority “proceeds with an inexplicable sense of urgency,” the chief justice said, and it “breezily disregards the costs that its decision will impose on retailers.” There are complex distinctions made in more than 10,000 taxing jurisdictions, he said. “New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters,” Roberts said, while Texas imposes a sales tax on plain deodorant but not on deodorant with antiperspirant, and Illinois treats Twix and Snickers bars differently for sales-tax purposes. “The Court is of course correct that the nation’s economy has changed dramatically since the time that Bellas Hess and Quill roamed the earth,” Roberts said. “I fear the Court today is compounding its past error by trying to fix it in a totally different era. … I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.” [Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the petitioner in this case. The author of this post is not affiliated with the firm.]<doc-sep>
The Supreme Court has issued its decision in the pivotal case of South Dakota v. Wayfair, Inc. The decision will have a profound effect upon sales taxation across the country. The case centered on whether a business is required to collect sales tax in the state of a purchaser, and if sales alone is sufficient to create “nexus” (the ability of a state to subject a business to its taxes). Wayfair W, +4.21% challenged the State of South Dakota law requiring any entity with a minimum of $100,000 in sales or 200 individual transactions within the state to collect sales tax. The Supreme Court sided with the state, overturning the previous nexus standard which established that a company needed to have physical nexus in a state in order to be liable for the collection of that state’s sales tax. Physical nexus is defined as having either property or payroll in the state, including a resident employee working from home or inventory stored in that state. Under the Wayfair ruling, the court determined that sales alone are sufficient to create nexus. Online and other out-of-state retailers are now required to collect sales tax once their sales in South Dakota exceed $100,000 or they have at least 200 individual sales transactions in the state. Other states are sure to follow suit and enact laws establishing nexus based on low-threshold sales. (A number of states currently have laws with higher thresholds, but they have been on hold pending the outcome of this case). The end result of the ruling will be an increase in tax revenue for states and higher operating costs for internet sales companies, which will inevitably translate into higher costs for consumers. Sellers are now obligated to comply with the individual sales tax rules, rates, and processes of states that enforce nexus. Many companies may need to contract with sales-tax preparation firms to cover the filings and upgrade their billing systems to ensure they are charging the correct tax rates based upon the address of the buyer. Flores Agreement: The Law That Could Trip Up Trump's Immigration Plan It is likely that most states and other jurisdictions that have sales taxes will implement similar laws. States have long argued that the inability to enforce sales-tax collection requirements on internet and other out-of-state sellers results in unfair competition and increasing budget deficits. This case provides a simple and appealing way for state legislatures to increase tax revenues without alienating in-state constituencies. In addition, failing to enact such legislation may result in a backlash from home-grown companies struggling to compete against the advantage afforded online and other out-of-state sellers who otherwise have no requirement to collect sales taxes on in-state sales. Finally, the concern centered on whether states, emboldened by this decision, will seek to expand the use of sales thresholds to create income-tax nexus for sellers. Many states have enacted economic nexus rules for income taxes that create a filing responsibility based on the amount of sales in a state. These amounts have generally been set at $500,000 and above. Now, states may seek to lower those thresholds to impact more sellers, and states that have not sought income tax nexus may move forward with new legislation.