Major Changes in Sales Tax Due to Supreme Court Ruling

By Meaghan Wingbermuehle

A must-read for: Businesses that sell in multiple states, whether online or not

South Dakota v. Wayfair Ruling by Supreme Court Overturns 26-year-old Sales Tax Law

Sales tax, as you know it, has changed overnight. The United States Supreme Court has just overturned 26 years of law in their South Dakota v. Wayfair decision. The Supreme Court ruled that the physical presence standard established in Quill v. North Dakota, 504 U.S. 298 (1992), was “unsound and incorrect” remanding the case back to the South Dakota Supreme Court for further proceedings. In doing so, the Supreme Court decision has opened the flood gates for multi-state sales tax remittances.

What does this mean to your company? Out-of-state retailers that meet certain sales or transaction thresholds will have to collect and remit sales tax, whether or not your company has a physical presence in the state. Small online businesses will be the hardest hit with significant compliance issues as to tracking sales and filing sales tax returns. Though this court case focuses on e-commerce businesses, this impacts any business making out-of-state sales.

The History of Sales Tax Law

In 1992, the Quill court case set the bar for sales tax laws amongst all the states. The Supreme Court ruled that a company must have some sort of minimum physical presence in a state to be subject to that state’s sales tax laws. This could be an office, warehouse rental, sales representatives, employees, third party installation, etc. This has been the “law of the land” and the minimum requirement for a state to impose sales tax rules on any company.

The Present: Internet Sales Change Sales Tax Revenue

Due to the changing economic climate with the internet and interstate commerce, states have wanted the current Quill case to be overturned. Forty-one states, two territories and the District of Columbia have asked the Court to reject Quill’s decision. The states argue that internet and out-of-state sales that do not have sales tax have an unfair advantage over brick and mortar stores. Read more on South Dakota v. Wayfair from our previous post. Additionally, states say that the loss of sales tax revenue from these sales has become harmful to the them as well as federalism and free markets.

The Decision: Supreme Court Sides with South Dakota

In 2016, South Dakota circumvented the Quill decision by writing sales tax laws that permitted the state to tax out-of-state retailers. Wayfair challenged and litigated the matter all the way to the Supreme Court. On June 21, 2018 the Supreme Court announced their decision in a 5-4 vote. They commented that the Quill decision was incorrect when decided in 1992, and since then, the Internet revolution has made its earlier error even more egregious and harmful. The Court states that Quill’s original decision has helped companies’ customers evade lawful sales tax unfairly and created a “tax shelter.”

The Effect: Law Impacts Any Business Selling in Multiple States

For any out-of-state company that meets certain sales thresholds in a state, the company may have to collect and remit sales tax, regardless of any physical connection with the state. This means, if you are an Illinois company that sells widgets online or through other remote channels, and your company sales in state ‘A’ exceed that state’s minimum sales requirement, then you will need to register, collect and pay sales tax.

This new interpretation of the law applies to any out-of-state company: a manufacturer, distributor, online retailer, service provider, etc. With over 10,000 taxing jurisdictions amongst the states, this is no small feat. A company must understand how their product or service is taxable in a state, and then determine the correct tax to collect. Many states follow a destination base for the tax rate to charge: where the product is shipped to determines the rate of sales tax to charge. With many states having taxing counties, cities and districts, one state could result in several hundred taxing rates that will need to be tracked and reported on the sales tax return correctly.

There are multiple states that have current or pending legislation that sets sales thresholds for this latest interpretation of sales tax. These states include: AL, GA, HI, IL, IN, IA, KY, ME, MA, MS, ND, OH, PA, RI, SD, TN, VT, WA, WY

How DHJJ’s SALT Team Can Help

To understand your company’s exposure in these states, keeping accurate records with the ship-to address is essential. Reviewing the annual sales sourced to other states will help determine if you have a sales tax requirement in a state. If the sales exceed a state’s revenue or transaction threshold, you should contact your DHJJ accountant at 630-420-1360 to discuss.

Your Action

Do you sell goods or services into other states? If so, this new change in the interpretation of the sales tax law may affect your company. Please contact your DHJJ accountant or our State and Local Tax (SALT) team at (630) 420-1360 with any questions or to review how this will affect your company.

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