The Supreme Court heard oral arguments this week to determine the sales tax consequences for online, remote sellers. The case, South Dakota v. Wayfair, Inc., No. 17-494, challenged the previous standard set by Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Quill case was determined in a time that predated the rise of Amazon, Wayfair, and other online retailers and found that in order for a state to be allowed to require a company to collect and remit sales tax, the company must have an actual, physical presence within that state. In 1992, that seemed relatively straightforward. If a company had a location within the state, then they were required to collect and remit tax. But when online retailers started making tax-free sales into states, the brick and mortar stores were at a substantial disadvantage.

Customers may have been happy, but states have been losing an increasing amount of revenue. To combat this, states like South Dakota have enacted what is known as “economic nexus,” among other solutions. Economic nexus creates a sales threshold, based on either number of sales into the state within a calendar year or gross receipts received from sales into the state within a calendar year. These exact thresholds vary from state to state, but none of them include the Quill requirement of actual, physical presence.

Companies like Wayfair fought back, resulting in the case heard this week in front of the Supreme Court of the United States. South Dakota’s law specifically imposed nexus on any business with annual sales more than $100,000 or with 200 separate transactions into the state. The supreme court justices were greatly concerned with the consequences of overturning Quill, despite its datedness.

Justice Sonia Sotomayor initiated the line of questioning by asking whether the problem was really the physical presence standard set by Quill or if the true issue was the states’ inability to capture tax in a new economy. After all, the same taxable sales are being made within the state. If the government cannot get the tax from sellers, they can certainly target the individuals who make purchases. From the state’s perspective, this is highly impractical and expensive. Targeting companies is substantially simpler than targeting each and every customer.

The Supreme Court’s concerns with overturning Quill were more substantial than one might imagine. The solution may seem simple to update an expired law to fit our current economy. But the implications of overturning Supreme Court precedent cannot be underestimated. The Supreme Court addressed in their questions the potential of retroactive laws, which would allow for states to collect back taxes on companies that previously did not collect and remit tax because they do not have actual, physical presence within the state.

In addition to the concern over retroactive laws, the justices were concerned about the impact on small businesses if the actual, physical presence standard is overturned. For example, imagine a small craft company on Etsy that makes sales in all 50 states of small dollar amount craft items. The complexity of understanding all the sales tax laws in each and every state, along with the time and expense of collecting and remitting and registering in all applicable states, could easily shut down a small business.

Many of the justices were concerned with the responsibility to resolve the issue. Specifically, it is usually Congress that passes laws to regulate the economy, not the Supreme Court. If the problems caused by Quill are substantial, then Congress should act. Unfortunately, Congress is not too motivated to act to increase state taxes when the money wouldn’t go to the federal government and any increase in taxes will hurt politician’s popularity. As it stands, if Quill is not overturned by the Supreme Court, it may motivate Congress to finally act. Meanwhile, if the Supreme Court does establish a new precedent going forward, it may solve the problem and create uniformity amongst the states.

Finally, the courts addressed the potential problems with inaction as well. If Quill is upheld, laws such as South Dakota’s economic nexus will be struck down across the country. States will react accordingly, and likely impose laws such as the notice and reporting requirement that exists in Colorado. Such notice and reporting requirements provide for states to require businesses to notify customers within their states that their purchases are subject to tax. In addition, these laws require businesses to report to the state who their customers are and what purchases each customer made. Are these laws a bigger burden on businesses than the actual collection and remittance of tax?

Whether the Supreme Court overturns Quill or lets it stand, one thing is for certain: big changes are coming for taxpayers in the near future.

Gerald “Jerry” Donnini II is a shareholder of the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Donnini concentrates in the area of state and Federal tax matters, with a heavy emphasis on the tobacco, alcohol, motor fuel and related industries. He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Use Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com.  For more information please call us at 888-966-8216.

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