A new US Supreme Court decision has reversed long-standing precedent and now, e-commerce businesses must collect taxes for sales transactions made with residents of other states under some circumstances. See , Case No. 17-494 (June 21, 2018). In a five to four decision, the court reversed not one, but two earlier precedents that held that a physical presence was necessary in a state to allow that state to require the retailer to collect sales taxes. At issue in Wayfair was a South Dakota law requiring the collection of taxes if the total sales to in-state residents exceeded $100,000 or if there were 200 separate sales transactions. The Wayfair majority held such to constitute sufficient contacts with South Dakota to satisfy one prong of what is called the CompleteAuto test.
This is a big change for any San Diego businesses with a large online presence. Depending on what your business is selling — automobiles or machinery, for example — the minimum thresholds may be easy to reach. While it is unlikely that many San Diego businesses have significant sales in South Dakota, many states are expected to quickly pass laws similar to the South Dakota statute. Nevada, for example, relies on sales taxes for about half of its annual state budget. As such, Nevada might be expected to quickly enact similar legislation.
Here is a quick review and discussion.
San Diego Corporate Law: Legal Review and Wayfair,Inc.
Under old caselaw decided in the days of mail-order paper catalogs, the US Supreme Court held that businesses could not be required to collect sales taxes unless they had a “physical nexus” with the relevant state. This rule dates back to a 1967 US Supreme Court case called , 386 U.S. 753 (1967). In that case, the court held that a mail-only catalog company located in Missouri with no physical presence or advertising in Illinois could not be taxed by the State of Illinois. The decision was reaffirmed in in the 1992 case of , 504 U.S. 298 (1992). Quill Corp. was/is a retailer of office supplies and much of its business is done via the internet. In Quill, it was held that the State of North Dakota could not impose sales taxes on Quill transactions without Quill Corp. having a physical presence in North Dakota.
Wayfair overrules both National Bellas and Quill. Thus, for purposes of taxation, no physical presence is needed. Instead, the court imposed a “new rule” which is actually the application of an old rule – whether there is “substantial nexus” between the online retailer and the state in question (and other prongs). The “substantial nexus” test originated in the case of , 430 U.S. 274 (1977). Having a physical presence in a state can be one aspect of a “substantial nexus” but “substantial nexus” can now be shown in other ways — such as a substantial virtual presence and significant sales to in-state residents. In Wayfair, the court held that the company’s connection to the state via the internet combined with its substantial sales to South Dakota residents were more than sufficient to satisfy one prong of the Complete Auto test. The other three prongs of the Complete Auto test are:
- Whether the taxes discriminate against interstate commerce
- Whether the taxes are fairly apportioned and
- Whether there is a fair relationship between the taxes and the services provided by the state
The Wayfair case is now going back to the trial court for a determination on the other three prongs. Those prongs are generally easy to prove. Prong one is likely satisfied if the law applies evenly to interstate and intrastate firms. Prong two is generally satisfied if the tax applies only to activities occurring in the state. Prong three is generally satisfied if there is some minimal service provided by the state that aids the person or entity being taxed such as the provision of roads, police protection, etc.
San Diego Corporate Law: What San Diego Businesses Should do
First and foremost, San Diego businesses should quickly evaluate how much business is done in various states. For now, businesses should assume that the $100,000 and 200 separate transactions will be the threshold. Courts could sanction lower thresholds, but those are the currently-approved benchmarks.
Once the evaluation is complete, your business will have a good idea of which state laws will have an impact on your business. Then it is important to begin learning the tax rates and the collection/reporting procedures. For example, will your business need a sales tax ID number for that state?
Contact San Diego Corporate Law
For further information, contact Michael Leonard, Esq. of San Diego Corporate Law via email or by calling (858) 483-9200. We here at San Diego Corporate Law keep track of new cases and new laws because changing laws potentially impose new obligation on San Diego businesses.
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