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Supreme Court Could Soon Reshape Rules for Out-of-State Sales Tax

The U.S. Supreme Court agreed on Friday to hear a case that could fundamentally reshape the rules concerning collection of sales tax on out-of-state sales.

The case, South Dakota v. Wayfair, Inc., involves a South Dakota statute that requires out-of-state sellers with no physical presence in South Dakota to collect South Dakota sales tax if their sales to state residents exceed $100,000 or if the seller makes 200 or more separate sales to South Dakota customers.

The South Dakota legislature passed the statute as a direct challenge to Quill v. North Dakota, a 1992 Supreme Court case in which the court held that a state could not require an out-of-state seller to collect sales or use tax on its sales to state residents unless the seller had a physical presence – such as a retail store, warehouse, distribution center, office, or employees – in the taxing state. Several other states have since passed similar statutes.

Relying on Quill, many internet retailers and other sellers do not collect sales tax in states in which they do not have a physical presence. Indeed, some internet retailers specifically plan their activities to avoid having sales tax collection obligations in certain jurisdictions. That has led to billions of dollars in uncollected sales tax nationwide. This has also pitted internet sellers against brick-and-mortar stores, which, by definition, have a physical presence and cannot avoid collecting sales tax in the states where they make sales.

If the Supreme Court were to overturn Quill, it could fundamentally change the circumstances under which sales tax must be collected, not only in South Dakota but nationwide. If states are no longer barred from requiring out-of-state sellers to collect sales tax, nearly every state (or at least every state with a sales tax) would likely enact legislation requiring out-of-state retailers to collect sales tax on sales to state residents. Such statutes could complicate matters for internet retailers, or any business that makes sales on the internet, as they would likely have to register and begin collecting sales tax in every state in which they make more than a de minimis amount of sales.

The Supreme Court is expected to hear arguments in Wayfair in April.

© 2020 Schiff Hardin LLPNational Law Review, Volume VIII, Number 16


About this Author

Virtually no business or investment activity is free from federal and state tax considerations and pitfalls. Schiff Hardin's tax attorneys advise clients on the tax aspects of the formation, financing, operation and termination of their business activities, and in the structuring of their investments.