Breaking: Supreme Court overturns Quill

The US Supreme Court has overturned the overarching standard for applying sales tax to online retailers.

In the 5-4 decision of South Dakota v. Wayfair, released on June 21, 2018, the Court found in favor of the State of South Dakota, overturning its 1992 decision in Quill Corp. v. North Dakota. Quill required a physical presence in order for a state to impose its sale tax regime on internet sellers and retailers.

The result is that sales could now be subject to sales tax collection requirements in any jurisdiction in which a retailers’ customer resides, should that jurisdiction choose to impose such a tax. Resale or other exemptions may apply, but the record keeping and additional compliance could become very complex and burdensome.

In the Court’s opinion, Justice Kennedy notes that the system and law South Dakota was defending was particularly favorable for overturning Quill. South Dakota’s law implemented a bright-line threshold of $100,000 in sales or more than 200 sales within the state. Out-of-state businesses with lower sales and fewer transactions are exempt from sales tax collection. This does not mean other jurisdictions will apply similar bright-line tests as South Dakota. It appears from the opinion that a state could tax sales from the first dollar.

In addition, South Dakota is a member of the Streamlined Sales and Use Tax Agreement. This agreement standardizes sales tax regimes in order to reduce administrative and compliance burden. It requires one state level tax administration, uniform tax base and simplified rates. Finally, South Dakota’s law cannot be applied retroactively and the state allows sellers to use the software provided, maintained and paid for by the state.

There is uncertainty as to how the various states will use this decision and South Dakota’s law in implementing or adjusting their current laws. A number of other states already had laws in place that challenged the prior standards, and many others will likely use this decision to capture internet sales and broaden their tax base.