The South Dakota v. Wayfair, Inc. case may mark a monumental development in the debate over the digital economy’s for the collection of sales tax. companies increasingly conduct business state lines, how states and the government craft tax legislation that the evolution of ‘nexus’ could have implications for e-commerce, services providers, and taxpayers alike.
The U.S. Supreme Court’s review of the nexus standards at issue in South v. Wayfair, Inc., could result in the overturning Quill Corp. v. North Dakota, which established the physical presence nexus standard that presently applies to sales tax. The current physical presence nexus standard severely limits states’ abilities to impose such a tax on an out-of-state seller. In December 2017, the U.S. Government Accountability Office estimated that state and local governments lost between $8 billion-$13 billion in revenue in 2017 because they did not have the authority to require sales tax collection from all remote sellers and because purchasers commonly fail to self-assess and remit use taxes. In addition to lost sales tax revenues, states are also losing income tax revenues because states typically impose income taxes on businesses with an in-state physical presence.
With this case, South Dakota has asked the Court to decide whether the physical presence standard is outdated, and whether states can constitutionally require out-of-state retailers to charge and collect sales and use taxes from in-state consumers when the retailer has no physical presence within a state. To date, over a dozen states, including South Dakota, have created economic nexus legislation for out-of-state sellers, despite a lack of authorization from Congress or the High Court. Moreover, about a dozen states impose economic nexus standards for state income tax purposes.
When the case was recently argued before the Supreme Court, Justices across party lines appeared divided. Many questioned the potential impact of retroactive applications, the cost burdens for businesses should they be required to collect sales and use taxes, and whether a signal from the Court for congressional action was the better course of action.
While companies will have to wait patiently for clarity from either the Supreme Court or Congress, they should take the time now to better understand their business connections across states. After all, both retailers of tangible products and digital services providers stand to face major repercussions if the nexus standard is altered. While some large online retailers have already begun collecting sales taxes, changes to nexus standards could disrupt the balance between online retail and brick-and-mortar retail. Digital service providers would also be charged with the complex task of understanding how their various services are taxed (or not) across state lines.
