&l;p&g;The recent 5-4 Supreme Court decision in &l;a href=&q;https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf&q; target=&q;_blank&q;&g;South Dakota v. Wayfair Inc&l;/a&g;., is the most significant ruling on the subject of internet sales tax since the 1992 Supreme Court decision in Quill Corporation v. North Dakota.
Prior to the Court&a;rsquo;s ruling in Wayfair, the law surrounding the ability of states to collect sales tax from internet transactions revolved around the notion or physical connection or nexus to a state.&a;nbsp; Under Quill, the court concluded that the physical presence rule was necessary to prevent undue burdens on interstate commerce. &a;nbsp;The Court&a;rsquo;s decision was guided by the principles that taxes must be fair and nondiscriminatory, that there must be substantial nexus with the jurisdiction and a relationship between the tax and any state-provided services. In other words, the court said those merchants were required to collect sales tax only when they had a physical presence, such as a store, office or warehouse, in the state in which the customer resides. For example, if an online retailer was located in Florida and sold goods to a consumer in Iowa, where it did not have a physical nexus or connection to (no office, employee, or other physical connection), the online retailer would not have the responsibility to collect sales tax from that transaction.&a;nbsp; The consumers would be obligated to pay a &a;ldquo;use tax&a;rdquo; on purchases even if the seller is not required to collect the sales tax.
&l;img class=&q;dam-image ap size-large wp-image-017bea25b734475b8086f72be6c883b9&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/017bea25b734475b8086f72be6c883b9/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Rep. Bob Goodlatte, R-Va., center, accompanied by Former Securities and Exchange Commission Chairman and former congressman Chris Cox, center left, Former Virginia Gov. Jim Gilmore, second from right, and Overstock.com board chairman Jonathan Johnson, right, speaks outside the Supreme Court after the court hears oral arguments on a case involving a rule stemming from two, decades-old Supreme Court cases on state&s;s sales tax collection, Tuesday, April 17, 2018, in Washington. South Dakota v. Wayfair is a case arguing about whether a rule the Supreme Court announced decades ago in a case involving a catalog retailer should still apply in the age of the internet. (AP Photo/Andrew Harnik)
Since the advent of the internet, states along with brick and mortar retailers have complained that the physical connection rules established in Quill have put them at an unfair disadvantage. Justice Anthony M. Kennedy writing for the majority in Wayfair wrote that the Quill decision caused states to lose annual tax revenues of up to $33 billion.&a;nbsp; The Court further noted, &a;ldquo;The Quill Court did not have before it the present realities of the interstate marketplace.&a;rdquo;
The Supreme Court case resulted from a decision by South Dakota to change its law to require all e-commerce sites to collect the sales tax, regardless of whether they have a physical presence. The law did carve out an exemption for small merchants &a;ndash; those with fewer than 200 customers in the state annually or sales below $100,000. South Dakota was a good state to bring the case since it does not have an income tax and is reliant on its sales tax for revenues.
Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch, writing for the majority opinion, believed that the emergence of the internet as a mainstream medium for interstate commerce caused the physical presence rule to become further removed from economic reality and resulted in significant revenue losses to the States.
The court stated,
&l;/p&g;&l;blockquote&g;&a;ldquo;But the administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a state. For example, a business with one salesperson in each state must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every state need not collect sales taxes on otherwise identical nationwide sales.&a;rdquo;&l;/blockquote&g;
In other words, the Court is saying that the physical presence test is an inadequate solution to address the administrative compliance costs facing companies that do business in multiple states. The Court believed that new technology coupled with the growing negative impact on states is enough to invalidate the physical possession requirement held in Quill. In addition, the majority in Wayfair believed that Quill puts both local and interstate businesses with physical presence at a competitive disad&a;shy;vantage relative to remote sellers. Remote sellers can avoid the regulatory burdens of state and local tax collection and can offer lower prices.
As the Court noted, &a;ldquo;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&a;rsquo;s consumers&a;mdash;something that has become easier and more prevalent as technology has advanced.&a;rdquo;
&l;!–nextpage–&g; In examining the majority opinion in Wayfair, it seemingly appears that the justices molded their arguments in a way to show that Quill and the physical presence rule is no longer valid in today&a;rsquo;s world of e-Commerce. The Court felt that so long as removing the physical presence requirement for states to tax internet sales did not violate the Commerce Clause, the requirement should be removed.
The Court wrote:
&l;blockquote&g;&a;ldquo;Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill.&a;rdquo;&a;nbsp; The Court went on to say,&a;rdquo; Further, the real-world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the &a;ldquo;far-reaching systemic and structural changes in the economy&a;rdquo; and &a;ldquo;many other societal dimensions&a;rdquo; caused by the Cyber Age.&a;rdquo;&l;/blockquote&g;
The Court addressed concerns that removing the physical presence requirement pursuant to Quill would cause an undue burden on many small online retailers by mentioning that, in this case, South Dakota affords small merchants a reasonable degree of protection. The South Dakota law requires a merchant to collect the tax only if it does a considerable amount of business in the State.
In the dissenting option, Chief Justice Roberts argued that overturning Quill could disrupt the development of the e-commerce industry which is such a critical segment of the economy.&a;nbsp; Justice Roberts believed that this should be the job of Congress and not the courts.&a;nbsp; As Chief Justice Roberts wrote, &a;ldquo;Nothing in today&a;rsquo;s decision precludes Congress from continuing to seek a legislative solution. But by suddenly changing the ground rules, the Court may have waylaid Congress&a;rsquo;s consideration of the issue. &a;ldquo;Justice Roberts also expressed concern about the costs this decision could have on small retailers:
&a;ldquo;The Court, for example, breezily disregards the costs that its decision will impose on retailers, especially small businesses. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. Over 10,000 jurisdictions levy sales taxes, each with &a;ldquo;different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence&a;rdquo; in the jurisdiction.&a;rdquo;
The majority and minority opinions each looked at solving the internet sales tax issue in different ways.&a;nbsp; The majority opinion believed that the Court could make the internet marketplace fairer for all retailers and states by removing the physical presence requirement.&a;nbsp; Whereas, the minority believed that Congress is better suited to more directly consider the competing interests at stake.
The impact of the Wayfair decision will be felt mostly by small online retailers.&a;nbsp; Small retailers, such as millions of Amazon re-sellers, will be scrambling to identify the right technology to help them comply with the new sales tax rules. Some small retailers are estimating the costs for complying with the ruling can be in the thousands. Separately, states will be looking into how they can formulate sales tax rules that are akin to the South Dakota bill.
Dissecting both opinions in the Wayfair case highlights how the rise of the internet and e-commerce has changed the way the Supreme Court views the states&a;rsquo; ability to tax all internet sales. It is clear that e-commerce online retailers are an important part of the future of our economy and now the states will begin to reap some of its benefits.