Scenario #1: South Dakota wins
Economic nexus does not unduly burden interstate commerce
If the Supreme Court decides in favor of South Dakota, a likely outcome is that it rules the state’s economic nexus law does not place an undue burden on interstate commerce. This would change the 1992 Quill ruling, although precisely how is unknown. The court could completely overturn the physical presence standard, or it could make a narrower change.
In this scenario, South Dakota would enforce SB 106, imposing a sales tax collection obligation on out-of- state sellers that in the previous or current calendar year made at least $100,000 in gross receipts from South Dakota sales, or conducted more than 200 separate sales transactions in the state. Other states would probably emulate the South Dakota law, just as states are emulating Colorado-style use tax notice and reporting requirements for non-collecting sellers, which the Supreme Court let stand.
Indeed, this is already happening. Indiana, Maine, North Dakota, Rhode Island, Vermont, and Wyoming have enacted economic nexus laws virtually identical to South Dakota SB 106, though some of these are not being enforced: North Dakota and Vermont are waiting to see what the Supreme Court decides; and Indiana and Wyoming cannot enforce their laws pending legal action.
Illinois and Missouri introduced legislation that mirrors SB 106 after the Supreme Court agreed to hear the challenge to Quill. If South Dakota wins, these states are well-positioned to act quickly.
A number of other states (e.g., Alabama, Louisiana, Massachusetts, Michigan, Ohio, Pennsylvania, Tennessee, Washington) have adopted policies that include different economic nexus provisions, and at least one — Hawaii — is considering an economic nexus measure this session. It’s unclear how a South Dakota victory would impact these laws. They could be validated if the court rules broadly that states can base a sales tax collection obligation on economic nexus. Or, they could be left in doubt if the court rules more narrowly.
In other words, South Dakota’s economic nexus law or something quite similar to it would likely become the new precedent for taxing remote sales.
Sidebar What it would mean for businesses if South Dakota wins:
Expect more states to enact legislation imposing a sales tax obligation on remote sellers, specifically economic nexus legislation like South Dakota SB 106. Businesses should prepare to have to collect and remit sales tax in more states. See what economic nexus could mean for your remote sales.
Scenario #2: Wayfair wins
Economic nexus creates an undue burden on interstate commerce
If the Supreme Court decides in favor of Wayfair, it could uphold Quill’s physical presence standard. South Dakota’s economic nexus law could be ruled unconstitutional.
In this scenario, South Dakota would not be able to enforce SB 106. Being deeply dependent on sales tax revenue, the state wouldn’t stop trying to tax remote sales. Instead, it would likely look for a new path, perhaps using another state law as a model. It’s extremely unlikely that South Dakota would abandon efforts to tax remote sales.
States that have adopted laws like SB 106 would presumably also not be able to enforce those laws. Those, like Alabama, Indiana, and Wyoming, that are currently embroiled in legal disputes could continue with their own efforts to overturn Quill. Or, they could abandon those laws as unenforceable and seek an alternative approach, perhaps using another state as a model. Like South Dakota, other states are unlikely to simply stop trying to tax internet sales.
Remote sales tax collections are improving in several states thanks to new requirements on marketplace providers and use tax notice and reporting requirements on non-collecting sellers. For example, Amazon is
now collecting on behalf of third-party sellers in Pennsylvania and Washington state. And at least 200 online retailers have agreed to collect Connecticut sales tax rather than turn three years’ worth of Connecticut customers’ sales records over to the state.
Other states will continue to enforce or pursue remote sales tax laws that differ from SB 106 (e.g., affiliate nexus, click-through nexus, taxes on marketplace sellers and providers, non-collecting
seller use tax notice and reporting) as the Supreme Court ruling is unlikely to address or impinge them. More challenges to Quill are likely to emerge, which the Supreme Court may agree to hear. Or not.
Sidebar; What it would mean for businesses if Wayfair wins:
Expect more states to abandon economic nexus and enact legislation imposing a sales tax obligation on remote sellers based on other connections. States may require marketplace sellers to collect tax on third-party sales, pursue use tax notice and reporting requirements for non-collecting sellers, or argue that nexus is created when a company places software or web cookies on in-state computers. Businesses will face continued uncertainty over their sales tax obligations.
If the Supreme Court sides against South Dakota, expect states to pressure Congress to get involved.
Could Congress upend the Supreme Court ruling?
Once a decision has been made, Congress could nullify it and leave the nexus rules neither upheld nor opposed. If it did nothing else, the Quill physical presence standard would stand. States would continue to broaden their nexus laws in an effort to increase remote sales and use tax collections, and those laws would continue to be challenged.
Despite Quill’s call for congressional intervention and the astonishing growth of ecommerce over the last two decades, Congress has not been able to come up with a solution. Although many sales tax states support removing the physical presence standard, others (especially but not only states with no sales tax) are vehemently opposed to the idea. The same dichotomy exists in the business community. Thus, Congress is being lobbied by warring constituencies:
• Streamlined Sales Tax (SST) states that want to simplify and modernize sales and use
tax administration in order to substantially reduce the burden of tax compliance
• Non-SST states opposed to SST and simplification
• Businesses and think tanks that are for simplification and remote sales tax collection
• Businesses and think tanks opposed to change and remote sales tax collection
Although many sales tax states support removing the physical presence standard, others are vehemently opposed to the idea.
Several bills that would grant states with simplified reporting requirements the right to tax certain remote transactions have been introduced in Congress, notably the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA). However, both bills were blocked by the House Judiciary Committee, whose chairman (Representative Bob Goodlatte) favors the Online Sales Simplification Act of 2016 (OSSA, available in draft form only). Another option on Capitol Hill is the No Regulation Without Representation Act, which would turn Quill’s physical presence standard into law.
Before the Supreme Court accepted the case, Rep. Goodlatte and several other lawmakers urged it to let Congress deal with remote sales tax: “The fact that Congress thus far has not enacted a federal solution … should not be seen by the Court as a reason to give up on Congress.” Since the court agreed to hear South Dakota v. Wayfair, Inc., there is renewed momentum on Capitol Hill to intervene. A group of Senate Republicans is working to resolve the issue this spring, but whether Congress will succeed in enacting remote sales tax legislation before the Supreme Court reaches a decision in June remains to be seen.
Congress could override a Supreme Court decision and enact MFA, RTPA, OSSA, the No Regulation Without Representation Act, or another measure. Or it could let the Supreme Court decision — whatever it is — stand.
What it would mean if Congress intervenes
It depends. If Congress loosens regulations and allows states to tax remote sales in some situations, states pushing to tax remote sales may be satisfied. States like New Hampshire that are opposed to remote sales tax would probably be displeased.
If Congress codifies Quill, making the physical presence standard law, many states will continue to fight for the right to capture tax revenue from out-of-state vendors.
Avalara is continuously monitoring the South Dakota v. Wayfair, Inc. case. As new information emerges, we’ll report on it in our blog.