Supreme Court Ruling - SD v. Wayfair - Background

2018-06-21 SCOTUS - SD v. Wayfair - Background
2018-06-21 SCOTUS - SD v. Wayfair - The Ruling
2018-06-21 SCOTUS - SD v. Wayfair - What Next?
2018-06-21 SCOTUS - SD v. Wayfair - Options
2018-06-21 SCOTUS - SD v. Wayfair - 2019

June 21, 2018 - The Supreme Court of the United States has announced its ruling in the case of South Dakota v. Wayfair. In the case heard by the court, the State of South Dakota defended its law requiring online retailers with more than $100,000 in sales or more than 200 transactions per year to collect and remit sales taxes on purchases delivered to customers in South Dakota.

The court ruled in favor of the State of South Dakota, which by itself only affects Wayfair and its co-defendants Overstock and NewEgg, but by extension could reshape the five-hundred billion dollar online retail market across the entire United States. Why? Because the ruling overturns the previous precedent set by the 1992 case of Quill v. North Dakota, which established that the State of North Dakota could not compell an out-of-state mail order retailer to comply with North Dakota sales tax laws when fulfilling orders in North Dakota.

In Quill v. ND, the court determined that the Commerce Clause, which prevents states from enacting laws that restrict the free flow of commerce between the states, applied to Quill, an office supply company in Maryland, a state that itself does not charge a sales tax. The court decided that they could not be compelled to collect and remit sales tax on orders placed by and delivered to customers in any other state except where they were legally registered. That case and the precedent it set remained relatively untouched until the internet began to reshape the U.S. retail market with companies like Amazon and Ebay, which opened their online marketplaces in 1995.

As sales by internet retailers grew, the states sought ways to recover what they saw as lost revenue. Every state that has a sales tax also has a use tax, which compells the buyer to pay the taxes due on purchases they made out of state. That means the revenue is not really lost, but for the most part is never collected. Why? Because the use tax depends on one thing, that the buyer voluntarily acknowledge the purchase and file the necessary paperwork along with the tax remittance. In such a scenerio, the state has very little ability to enforce the use tax outside of purchases that must be registered in the state like a car, boat or RV, or a large commercial purchase that leaves a paper trail such as a registered contract or lien filing.

The next step the states took was to expand the definition of what it means to be a business entity in a state. Certainly a company opening its doors in a state required that the company register with the state and follow the laws in that state as regards the collection and remittance of sales taxes. For large retailers like WalMart and Target, there was no doubt where they had stores and were registered as a business in the state. Regardless, when it came to internet sales ordered through a server in one state, shipped from a warehouse in another state, and delivered by the post office, UPS, or FedEx to the customer in yet another state, questions still remained.

New laws and legal challenges continued to mount. The term "nexus" began to be incorporated into state sales tax laws. A nexus applied to any person or company that had any physical presence in the state such as a store, a warehouse, an office, or a personal representative. If a nexus could be established, then the state felt they had a legal standing with which to compell the selling party to comply with the tax laws and be responsible for the collection and remittance of taxes on all sales delivered anywhere in the state.

Other laws were enacted that were directed to larger organizations. These laws mandated retailers of high volume sales to comply with state laws whether there was a nexus or not. Though there was no standing precedent for such laws, with the dollars involved, it forced these ones to comply or risk long, protracted, and expensive legal battles, which could easily outweigh the cost of compliance. Rather than loosing access to large markets such as New York, California, or Texas, most chose to comply, but doing so with much reluctance.

That briefly brings us down to today's decision in South Dakota v. Wayfair. Although the law in South Dakota is also directed at larger organizations, it comes from one of the smallest markets in the U.S. As such, it is a game changer. To see how, please continue with the next post, 2018-06-21 SCOTUS - SD v. Wayfair - The Ruling.