Few consumers have paid all required sales taxes on taxable goods purchased from out-of-state vendors, especially when those items have been purchased from sellers on the internet. While most states have statutory requirements for consumers to pay a use tax on these purchases, the cost and complexity of collecting those taxes has led to widespread noncompliance. The outcome, of course, is that those states to which the taxable goods and services are being delivered have been losing hundreds of millions of dollars of tax revenue.
While the obvious solution is to have the out-of-state sellers collect and remit the sales taxes due, those sellers who have been selling taxable products and services into states in which they have no physical presence have been relying on a 1992 Supreme Court decision to circumvent such responsibility. A monumental Supreme Court decision (5-4) handed down earlier this week is likely to change this practice.
In South Dakota v. Wayfair, Inc. the U.S. Supreme Court overturned the decades-old “physical presence” rule first set forth in Quill v. North Dakota. The Quill ruling effectively required an out-of-state seller of taxable goods to have a physical presence within a state before that state could require that same seller to register, charge, collect and remit sales tax. Citing a dramatic change in technology from 1992, when Quill was decided, the Supreme Court’s decision overturned this requirement and will permit states to enact legislation to compel out-of-state sellers to charge, collect and remit sales tax to the home state of the buyer.
Though not unexpected, the Wayfair decision, nevertheless, represents a major revision in the rules related to the imposition of sales tax and is likely to lead to substantial changes in the registration, collection and remittance of sales taxes by out-of-state sellers, in general, and internet-based sellers, in particular. As noted, online sales businesses are certain to see a dramatic change as a result of this ruling.
However, even though the Supreme Court has overturned Quill, there remains no federal legislation specifically addressing this matter. As a result, each state may draft its own statute to comply with this decision. As of the release of the Wayfair opinion, 31 states have either passed legislation or are currently in the process of enacting legislation which conforms to the decision in this case (see related posts below). These new statutes confirm that most states, if not all, will quickly adapt to the new position of the Supreme Court in this matter. Both business owners and consumers should expect significant and more-encompassing changes to be implemented across the country in the sales and use tax arena.
The Tax Services Group of Grossman Yanak & Ford LLP will continue to report on this decision as developments evolve. In addition, we are currently studying the case further and will set forth greater detail in an upcoming Tax Alert. Click here to subscribe to our email alerts.