United States: Justice Kennedy Bids Adieu With A Victory For The States

It never really seemed to make much sense, did it? From its infancy as a start-up bookseller called Amazon.com to its current stature as a multi-conglomerate retail revolution, online shopping never had to adhere to the same tax burden as its traditional brick-and-mortar counterparts. Along the way, consumers never bothered to question it. Chalk it up to the maverick spirit of the information superhighway, they said. And, hey, it sure makes holiday shopping a lot more affordable.

Until now.

In South Dakota v. Wayfair Inc1. , the U.S. Supreme Court handed down a landmark decision on June 21, 2018, ruling that states can now collect and remit sales taxes from internet retailers, even if they have no physical presence in the state. More than 50 years of blocking states' ability to do so via Quill and National Bella Hess2 was overturned. Depending on who you ask, the Court might be the grinch that stole tax-free internet shopping, or a savior to states in desperate need of tax revenue. Many view the decision as a victory for Main Street businesses that have long complained about being at a disadvantage relative to online sellers (not to mention the time and expense of having to actually leave your home), and a boon for state and local tax revenues.

It's easy to say consumers and some online retailers are going to take a hit given this new landscape, but it might not be as bad as you think. Most states already require consumers to pay a "use tax" equivalent to the state sales tax. And while there were some tremors in a few big-game online sellers' stock prices (Amazon shares dropped 1.1 percent and Overstock.com was down more than 7 percent the day the decision was announced), many market analysts feel the fluctuations will probably level out in the short-term due to several companies' track records of anticipating and preparing for this sea of change. Wayfair, for example, said in a post-decision statement that it already collected sales tax on approximately 80 percent of its orders in the U.S. and, as a result, did not expect the decision to have any noticeable impact on their business. The effect on Amazon could be even smaller since, as of last year, the company started collecting sales tax in the 45 states that have one. But close to half of Amazon's total online sales is generated from independent merchants who post their inventory there. In most states, those merchants are responsible for calculating and paying the state taxes, which has been difficult to track.

A Little Too Ironic?

The irony here is that, with the Wayfair decision, the Court essentially dismantled a system it created. The 1992 Quill decision (piggy-backing off the National Bella Hess case from 1967) helped pave the way—however unwittingly—for the immense growth of online retail by allowing companies to sell goods nationwide while circumventing the uber-complicated patchwork of state and local tax codes. To say that online retail has changed a lot since then would be the understatement of the millennium. Amazon is no longer the quirky tech fledgling that Jeff Bezos hatched in his garage 25 years ago.

As we cited in a previous post about the fate of Quill, online sales have almost doubled just since 2013, skyrocketing from $263 billion to a projected $414 billion in 2018. This isn't just an economic change, it's a cultural change, which is when things really get interesting (witness Supreme Courts correcting themselves after 50 years). Amazon has gone from $7 billion in sales in 2004 to $178 billion in 2017, raising the ire of President Trump in the process for what he deemed to be unfair tax practices. (It probably didn't help that Bezos bought The Washington Post in the process). With numbers like that, one can quickly calculate the huge amount of uncollected sales tax on revenues of that magnitude. Writing for the majority in the 5-to-4 ruling, Justice Anthony M. Kennedy said the Quill decision probably caused states to lose annual tax revenues of up to $33 billion, and in South Dakota alone, estimates put the loss at $48 to $58 million annually.3 The entire time, state budgets were increasingly hurting for ways to repair crumbling infrastructure and support educational and social services.

With regards to stare decisis, Kennedy wrote:

"Because the physical presence rule as defined by Quill is no longer a clear or easily applicable standard, arguments for reliance based on its clarity are misplaced." He added, "If it becomes apparent that the Court's Commerce Clause decisions prohibit the States from exercising their lawful sovereign powers, the Court should be vigilant in correcting the error. It is inconsistent with this Court's proper role to ask Congress to address a false constitutional premise of this Court's own creation." Kennedy acknowledged the changing times: "The Internet revolution has made Quill's original error all the more egregious and harmful. The Quill Court did not have before it the present realities of the interstate marketplace, where the Internet's prevalence and power have changed the dynamics of the national economy."4

Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch joined the majority opinion.

It will not be lost on historians that the Wayfair decision will go down as the last decision, and one of the few rare tax decisions, authored by Justice Kennedy just a week before he announced his retirement from the Supreme Court

In dissent, Chief Justice John G. Roberts Jr. agreed that the Court's rulings in this area had been "wrongly decided," but said there were insufficient reasons to overrule the precedents. "Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress," he wrote.5 Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan joined the dissent.

Retroactive Taxes Remain a Concern

The overturning of Quill is perhaps the most groundbreaking event in sales and use taxation in decades. Still, the Court did not offer guidelines regarding South Dakota's economic nexus standard and whether or not it should be the bellwether by which all states should follow, nor did it indicate if states can seek sales taxes retroactively (South Dakota's law does not). Instead, the decision of the South Dakota Supreme Court was vacated and remanded back to South Dakota for further review. Meaning, technically speaking, there is no set standard for how states should go about taxing online sales, leaving more than 10,000 (no, that's not a typo) different state and local taxing districts to decide for themselves. What could possibly go wrong?

Hence, there is a bit of a wild, wild west feel to what's happening right now. Many experts think that South Dakota's current law could become the standard-bearer, in that it establishes two reasonable criteria for requiring remote sellers to collect sales tax on sales of tangible personal property, any products transferred electronically or services delivered: (1) the remote seller's annual gross revenue exceeds $100,000, or (2) the remote seller has 200 or more separate transactions. Since the Wayfair decision, some states (e.g., Louisiana) have already issued guidance/statements confirming similar nexus standards as South Dakota and affirming remote sellers are required to collect sales tax where as other states (e.g., Minnesota) are taking some time to analyze the decision. New Jersey introduced Senate Bill 2794 and Assembly Bill 4261 to extend sales tax collection responsibility to remote sellers that meet the economic nexus standards consistent with the South Dakota standards as noted above.

Either way, the mind reels with questions about what's next:

  • Will states attempt to collect taxes retroactively? If so, how does that work?
  • Is South Dakota economic nexus standards the model for all states to base their new laws upon?
  • Will there be any leniency? Amnesty Programs?
  • When will states actually start collecting taxes for online sales? Immediately? 30 days? 60 days?
  • Does Congress have anything to say about all this?
  • It can't really be a complete free-for-all...can it?

Over 30 states currently have internet sales tax laws, several of which replicate South Dakota, and many others are expected to follow. In the past year, Washington State and Pennsylvania enforced requiring internet retailers to collect taxes on third-party sales. Some laws are more creative than others, e.g., in 2017, Massachusetts asserted that internet cookies, or data files stored on your computer by a Web browser, constituted tangible personal property—and presence—for purposes of sales tax (the state was forced to rescind that stance after a lawsuit challenged its constitutionality). Other states will have to adapt their current laws if they want to take advantage of the Wayfair decision, which is sure to kick-start a maelstrom of activity in legislatures.

It's interesting that this was a close 5-4 decision, because it underscores the need for Congress to participate in protecting the growth pattern of the e-commerce sector of the economy. While they have made some attempts, Congress remains stymied between proposed solutions, such as the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), which lets states collect if they agree to simplify their sales taxes. There was also a proposal from Rep. Bob Goodlatte (R-VA) calling for the sales tax to be a business obligation rather than a consumer obligation, and have it collected based on the tax rate where the company is located but send the revenue to where the customer is located. Perhaps the Court's decision in Wayfair will be the impetus for Congress' renewed focus and action.

The nexus-creating activity of the proposed bills varied throughout the years. Yet, what has been consistent is Congress' failure to enact legislation regarding this matter. If they did, there would probably be more uniformity (translation: less confusion) around how taxes were collected, possibly easing the pain for everyone involved—states, online sellers, and consumers alike. Congress would also be able to protect taxpayers from a retroactive application of the nexus changes.

Expect the Unexpected

The online sales tax struggle is not over, as Justice Kennedy added in his opinion:

"These issues are not before the Court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses."6

With a multitude of questions still looming over the Court's decision, it will be important to remain vigilant about how this massive change could impact your business. It is vital to re-assess your risk of an expanding nexus footprint and stay on watch for how new tax laws could affect your operations.

Here are some key considerations that businesses should carefully evaluate:

  • Navigating the new nexus footprint;
  • Sales and separate transaction activity by state;
  • Flexibility in monitoring taxability of goods and services for additional jurisdictions based on new physical presence standard;
  • Adaptability with revenue sourcing, invoicing and appropriate line item billing to support all applicable jurisdictions;
  • Preparing for potential surge in registration and sales and use tax reporting responsibilities for a potentially large population of jurisdictions keeping up with ever-changing state and local sales and use tax rates.
  • Record retention requirements associated with online activities to ensure you can appropriately support transaction detail during an audit and for other reporting purposes; and
  • Tracking legislative updates related to economic nexus

You can read the majority opinion, together with the concurring opinions and the dissent, here.

Footnotes

1. South Dakota v. Wayfair, Inc., U.S. S. Ct. Dkt No. 17–494, 6/21/2018

2. National Bella Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

3. per p. 2 of the Supreme Court decision, citing Sales Taxes Report, at 11-12; Brief for Petitioner 34-35 citing estimates of $23 and $33.4 billion

4. per p. 4 of the Supreme Court decision, Syllabus

5. per p. 1 of the Supreme Court decision, Roberts, C.J. dissenting

6. per p. 22 of the Supreme Court decision, Opinion of the Court

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions