In a highly anticipated decision, the Supreme Court voted 5-4 to overturn the 1992 decision in Quill v. North Dakota, regarding state level sales tax for online retailers. The discussion surrounding South Dakota v. Wayfair is a modern reevaluation of what it means to have a “physical presence” within a state.
As discussed in a previous blog post, for years the Quill decision prevented states from collecting sales tax from online retailers. The rule established in Quill was that lack of a physical presence within a state circumvents a state’s right to collect taxes from these retailers. Many states have sought to reject this standard, and instead have implemented state level regulations to collect from those businesses who have an online presence within the state.
At the heart of Wayfair is South Dakota’s mandated collection of taxes from e-commerce businesses based on a minimum revenue standard within the state (i.e. if you collect enough revenue within the state, you will be required to pay tax). South Dakota’s departure from federal court precedence represented a bold move, which appears to have earned them a victory.
This is a major win for states, who will have access to new (and significant) revenue streams. It is also a win for brick and mortal retail stores that have long pined to even the playing field with online retailers who do not pay as much in sales tax. Even large e-commerce businesses (read- Amazon) will not experience too much of a hit because they had already been mandated to begin paying state sales taxes in 2017. The real burden will fall upon small online retailers who 1) have little or no infrastructure for managing and navigating these new tax requirements; and 2) will take a major blow to revenues.
There is a lot of remaining uncertainty surrounding this decision. Many questions persist; Will the federal government oversee these state level tax regimes? Will there be a standard for minimum revenue or will each state be allowed to determine? How will tax rates be regulated? Will there be exemptions for certain conditions?
The Wayfair decision is meaningful, not only for its immediate effects on small business owners, but also for the larger message the Supreme Court is sending – in essence, that online presence is as important as physical presence. This is an important distinction that will likely have a continued effect on the growing body of law governing e-commerce businesses.
Moisan Legal PC is a boutique business law firm based in New York City catering to entrepreneurs, creatives and innovators.