SCOTUS Decision in Wayfair Prompts States to Enact Similar Sales Tax Laws

On June 21, 2018, the Supreme Court of the United States issued its decision in South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).  The Wayfair decision is very significant in that it overturns the longstanding precedent that historically prohibited any state from requiring out of state businesses to collect sales or use taxes on sales of products shipped into the state for use within the state.  Put more simply, depending on the volume of sales within a specific state, the Wayfair decision allows states to require out-of-state sellers to collect and remit sales taxes on sales of products or services to be provided with the state.

Background: Prior Law and the Wayfair Decision

Prior to the Wayfair decision, the Supreme Court had interpreted the Commerce Clause to limit the ability of states to tax, or require the collection of taxes by, entities without a physical presence within the state attempting to levy the tax.  Specifically, the Court had ruled that a state could not require an out of state seller to collect and remit a sales and use taxes unless the seller had a physical presence within the state.  See, National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967); and Quill Corp. V. North Dakota, 504 U.S. 298 (1992).  For example, prior to the Wayfair decision, a business that sold products nationwide on the internet could not be required to collect the South Dakota sales or use taxes on sales that were shipped into the state of South Dakota unless the company had an actual physical presence within South Dakota. 

Due to the growth of the internet and the economy’s move towards greater online sales, states were unable to collect any amount of taxes on sales to individuals within their borders, resulting in a substantial amount of lost revenue.  The Court noted that the prior interpretation of the law caused states to lose up to $32 billion in tax revenue each year and that the state of South Dakota alone lost between $48 and $58 million annually.  Concern about the lost revenue caused the State of South Dakota to declare an economic emergency and passed a law which required out-of-state sellers to collect and remit the South Dakota sales tax on sales to individuals within the state if: (1) the seller, on an annual basis, either delivers more than $100,000 of goods or services into the state or engages in more than 200 separate transactions for the delivery of goods into the state; and (2) the Supreme Court clearly establishes the constitutionality of the law.

Recognizing the shifting economy and the significant financial impact on the states, the Court overturned its rulings in Bella Hess and Quill and ruled that a South Dakota law that required the collection and remittance of the state’s sales and use tax by sellers who delivered more than $100,000 of goods or services into the state or engaged in more than 200 separate transactions for the delivery of goods or services into the state collect was permissible under the commerce clause because the tax was only levied against sellers with a substantial nexus to South Dakota.

The Impact of the Wayfair Decision

The obvious impact of the Wayfair decision is that out-of-state sellers of goods and services in South Dakota may be required to collect the South Dakota sales and use tax.  Beyond that obvious impact, many other states have enacted laws requiring out-of-state sellers to collect and remit sales and use taxes, possibly requiring all businesses with virtual storefronts to do so.  Though it should be noted that such requirements will not directly increase the amount of taxes actually paid by such out-of-state entities because the entities will only be required to remit the amount of taxes that it should have collected from consumers at the time of the sales transaction.  However, requiring businesses to collect sales and use taxes may adversely affect sales by increasing the effective price that consumers are required to pay for certain products or services.

Although the Wayfair decision is limited to parameters of the South Dakota sales tax law, since the Supreme Court’s decision, many states have enacted similar laws.  As of February 1, 2019, in addition to South Dakota, 32 states and the District of Columbia have enacted laws requiring remote sellers to collect sales tax.  As demonstrated by the table below, the majority of states have enacted acts that are similar to the South Dakota law as approved by the Supreme Court, and several states have enacted variations of the South Dakota law.

The Annual Threshold Transaction Amounts Requiring the Collection and Remittance of Sales or Use Taxes by Out-of-State Sellers	Types of Transactions Included in the Threshold Test	States Establishing this Requirement as of February 1, 2019
Either more than $100,000 in sales OR at least 200 separate transactions	Only sales of tangible personal property are included in determining if the threshold is met.	HI, IL, IN, IA, KY, LA, ME, MD, MI, NC, ND, SD, RI, UT, VT, and WV
Either more than $100,000 in sales OR at least 200 separate transactions	Both the sale of tangible personal property and the sale of services are included in determining if the threshold is met.	CO, DC, WI, and WY
Either more than $100,000 in sales OR at least 200 separate transactions	The sale of tangible personal property, the sale of electric or digital products and services, and the sale of services are all included in determining if the threshold is met.	NJ and SD
Either more than $100,000 in sales OR at least 200 separate transactions	Both the retail sale of tangible personal property and the retail sale of services are included in determining if the threshold is met.	WA
Either more than $100,000 in sales OR at least 200 separate transactions	Only sales of tangible personal property are included in determining if the threshold is met.	NE
Either more than $250,000 in sales OR at least 200 separate transactions	Only sales of tangible personal property are included in determining if the threshold is met.	CT
Either more than $250,000 in sales OR at least 200 separate transactions	Both the sale of tangible personal property and the sale of services are included in determining if the threshold is met.	GA
Either more than $250,000 in sales AND at least one other activity described in the state law (ex., advertising on cable television) conducted within the state	Only sales of tangible personal property are included in determining if the threshold is met.	AL
Both more than $300,000 in sales AND at least 100 separate transactions	Only sales of tangible personal property are included in determining if the threshold is met.	NY
Both more than $500,000 in sales AND at least 100 separate transactions	Only sales of tangible personal property are included in determining if the threshold is met.	MA
More than $250,000 in sales	Only sales of tangible personal property are included in determining if the threshold is met.	MS
More than $100,000 in sales	Only sales of tangible personal property are included in determining if the threshold is met.	SC
More than $10,000 in sales	Only sales of tangible personal property are included in determining if the threshold is met.	OK
Engages in the regular solicitation of sales, and, either: (1) has 10 or more sales totaling more than $100,000 within the state, or (2) has 100 or more retail sales transactions within the state	Only retail sales of tangible personal property are included in determining if the threshold is met.	MN
More than $10,000 in total sales and the seller has an agreement with an in-state retailer to refer potential customers to the out-of-state seller for a commission	Only retail sales of tangible personal property are included in determining if the threshold is met.	ID

Wayfair’s Impact on Tax-Exempt Associations

The primary ways in which Wayfair will affect exempt organizations relates to the requirement to collect and remit sales taxes on online sales and to pay sales tax on online purchases.  As such, exempt organizations need to: (1) identify the states in which they engage in the sale of products and services; (2) determine whether any such state requires the collection of sales or use tax for the sale of such products or services; (3) determine whether the organization’s sales within each state meets the threshold for collecting and remitting the state’s sales and use taxes; (4) determine whether the state exempts tax-exempt organizations from the collection or remittance of such taxes; and (5) apply for such exemption where applicable.