The news headlines have been filled with references to the Supreme Court’s recent ruling on the South Dakota v. Wayfair case. On June 21, the Court ruled in favor of South Dakota and overturned a long-standing precedent essentially requiring businesses to have a physical presence in a state before the state could mandate sales tax be charged and collected. In other words, previously a state was unlikely to make or sustain sales tax nexus against a company without the company having a physical presence in the state.
The Supreme Court overturned the conclusions of a 1992 case, Quill v. North Dakota, citing them to be “unsound and incorrect.” It even went so far as to say, “Quill creates rather than resolves market distortions.” Both Quill and National Bellas Hess v. Illinois (1962) cases concluded that a business had to have some type of physical presence in a state before the state could assert sales tax nexus. Interestingly, three of the current justices were on the Quill case.
While there were various reasons cited for overturning the conclusions reached in Quill, one that many businesses can relate to is the disparate treatment of brick and mortar versus online retailers. “(Quill) treats economically identical actors differently for arbitrary reasons. For example, a business that maintains a few items of inventory in a small warehouse in a state is required to collect and remit a tax on all of its sales in the state, while a seller with a pervasive Internet presence cannot be subject to the same tax for the sales of the same items.”
The Court’s decision to overturn the physical presence requirement is a significant change in the application of sales tax rules and could lead to the taxation of most internet product sales. But it’s not just internet retailers that will be impacted; it will also impact any business selling taxable products or services across state lines, regardless of how the sale is made.
Some states already have statutes in place that position them well to capitalize on this ruling; other states are working on modifying their statutes. And then there are those states which may take longer to determine if any changes will be made and what those will look like. Keep in mind that while this change is substantial, it does not give states unlimited authority with regards to taxing out-of-state businesses.
What should businesses be doing in response to the Wayfair case? To start with, it’s critical to have a good handle on your out-of-state sales and any other activities in those states. At a minimum, your accounting system should help you identify and quantify sales being made to out-of-state customers. It’s also important to understand the current and evolving rules in each of those states. Immediate action may be required, but in many instances, a wait and see approach will be the best you can do.
This long-standing physical presence standard restricted how states taxed out-of-state businesses. With that guardrail removed and states changing their rules in response, businesses should pay special attention to sales tax compliance for the foreseeable future. Look for future JPS blogs to keep you updated.
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Johnson Price Sprinkle PA is a 60+-year-old accounting firm providing small to middle market businesses with tax, business consulting, audit, fraud, and technology solution services. With offices in Asheville, Boone, and Marion, NC, our CPAs and JPS team strive to provide personal service alongside technical expertise resulting in our clients’ long-term financial success. We also invest time and energy in our community, taking pride in doing what we can to make Western North Carolina a better place. JPS Mission: To Be Greater by positively impacting our Clients, People, Community and Profession.