The U.S. Supreme Court recently ruled in favor of South Dakota in its case against Wayfair, Inc. What does this Wayfair court ruling mean for online retailers?
The case focused on how state tax is charged and collected for out-of-state sales that are sold to South Dakota residents. South Dakota can now enforce its Remote Seller Compliance law (SB 106). This law requires sellers in other states who fit either of the following criteria to collect and remit sales tax:
- Has more than 200 taxable sales transactions that are delivered to South Dakota in a calendar year
- Has more than $100,000 in goods and services delivered to the state
While this decision only affects purchases delivered into South Dakota, the ecommerce world is wondering just what ruling will mean for the future of ecommerce.
Will other states follow South Dakota’s lead? Will the transactional criteria be changed to affect other, smaller ecommerce sellers?
Only time will tell whether those possibilities will happen, but in the meantime, let’s take a closer look at the case and ruling.
South Dakota vs. Wayfair, Inc. – The History
To understand the arguments and the ruling, we first have to look at a previous Supreme Court case, Quill Corp. vs. North Dakota. In this case, Quill argued that a state cannot tax a business unless is has a substantial connection (known as a nexus) with the state, which is defined as a physical presence. A physical presence could mean a warehouse, fulfillment center such as Amazon FBA, brick-and-mortar store, or even a home office of a freelance employee. The case has been repealed and remanded to South Dakota’s Supreme Court for further proceedings.
The South Dakota vs. Wayfair, Inc. case focused on the Remote Seller Compliance law, which establishes economic nexus and maintains that not being able to tax remote sellers is eroding South Dakota’s sales and use tax base, causing “imminent harm to this state.”
When petitioning the court to take the case, the state used the argument that “the physical-presence exception for sales tax collection duties is causing serious harms this Court could not have seen when it decided Quill in 1992.” They outlined the following reasons:
- It harms states by depriving them of critical revenue
- It harms brick-and-mortar retailers because there is not a of the unlevel playing field
- It harms interstate commerce as well, because “Quill ends up burdening a lot of interstate commerce — achieving the opposite of its own design.”
The Wayfair legal team argued the following points in their petition for the court to reject the case:
- That Congress is the proper institution to address the issue
- That South Dakota’s challenge to the Quill decision is “non-justiciable”
- That the principles of stare decisis (fancy word for previous policies) weigh against granting the petition
- That the petition doesn’t address retroactive liability
- That developments in other states further support denial of the petition
The court heard these arguments in April, and in June issued the decision.
South Dakota vs. Wayfair, Inc. – The Ruling
In its ruling, the Supreme Court of South Dakota overturned the Quill decision when it ruled that the decision was flawed and that rejecting it “is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents.”
In the Wayfair case, the ruling was specifically focused on the SB 106 law that sought to collect sales taxes on out-of-state purchases delivered to South Dakota. The law had been passed in 2016.
Several online retailers including Wayfair, Newegg, and Overstock.com argued that the law was unconstitutional. The Supreme Court, in a 5-4 ruling, said that the law is constitutional.
This means the state can collect sales taxes as outlined in SB 106 as it set out to do two years ago.
What Does it Mean for Ecommerce Retailers?
It is expected that other states will follow South Dakota’s lead and enact economic nexus legislation sooner rather than later. In fact, in the time since the court agreed to hear the South Dakota case, several states have already adopted economic nexus, including Connecticut, Georgia, Hawaii, Illinois, Iowa, and Kentucky.
The most affected ecommerce retailers will be those that operate today’s “Mom and Pop” businesses – those who earn modest incomes by opening online stores. If other states follow South Dakota’s lead and require state taxes to be paid for online purchases, it will require that online retailers become familiar with the tax laws in the states they sell to. More likely, they will have to take on the added expense of hiring a tax professional to manage this part of their business.
Will it be worth it for smaller businesses to continue to sell online? Or will the changes to sales tax laws make it too costly for them to stay in business? Only time will tell.
For now, it’s a waiting game to see what transpires.