Rarely does a piece of state legislation impact hundreds of millions of Americans, but South Dakota Senate Bill 106 of 2016 will. Not for what it did in South Dakota, but because it is the basis of Supreme Court decision of South Dakota v Wayfair that allows states to collect sales tax from online retailers, regarless of whether or not those retailers have nexus (a physical presence) in the state. Statistics show that nearly 80% of Americans shop online, and often shop online without paying state and local taxes. That represents billions of dollars of lost revenue to states.
The decision is being hailed as a landmark ruling for state and local finance, and comes at a time when states are struggling with stagnant sales tax revenues, mostly due to increased online sales.
So, let’s first go back prior to 2016. In 1992 the Supreme Court ruled, in Quill v North Dakota, that states could not force an online retailer to collect sales tax in a state, unless the retailer had a physical presence in that state. The case was a result of an attempt by the state of North Dakota to collect sales tax from Quill, an office supply company, that had no nexus in the state. With Congress not about to to act, states were left with no options.
In March 2015, Justice Anthony Kennedy gave states some hope in his concurring opinion in Direct Marketing Association v. Brohl. Justice Kennedy wrote, the “legal system should find an appropriate case for this court to reexamine Quill.” Kennedy criticized Quill for many reasons, specifically that internet sales had risen astronomically since 1992 and states and local governments are unable to collect most taxes due on sales from out-of-state vendors.
With that glimmer of hope, the National Conference of State Legislatures (NCSL) took action. Its Executive Committee Task Force on State and Local Taxation prepared draft legislation to share with state legislatures that wish to pass laws requiring remote vendors to collect sales tax in order to challenge Quill, bills that came to be known as Anti-Quill bills.
Current NCSL president, South Dakoata State Senator Deb Peters introduced SD SB 106, and when the bill was signed, it was the first bill ready to bring a challenge to Quill, and became the basis of the Wayfair case.
With the Wayfair decision, the Supreme Court just leveled the playing field for all retailers. Whether in-store or online, if a company sells into a state with a sales tax, that business will soon have to collect. In a 5-4 decision, the U.S. Supreme Court clearly and decisively threw out its physical presence rule calling it “unsound and incorrect,” and concluding that “[r]ejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents.”
Now for the billion dollar question – What will states do now? That depends on whether or not states are part of the tax agreement compact known as the Streamlined Sales and Use Tax Agreement.
States in the compact will likely see little change. More than 20 states (including South Dakota) are already part of the agreement and many have been changing their laws from point of origin (where did the product ship from) to point of use (where did the product ship to) over the last couple of years. There might be some tweaking around the edges, but nothing significant unless led through the compact.
But what if your state is not in the compact?
For most of these states, look no further than the South Dakota bill that started it all. States will need to pass legislation that establishes some level of economic presence that becomes the standard for “substantial nexus.” In South Dakota, that standard is $100,000 of sales in state and/or 200 separate transactions in the state. SD SB 106 was praised for its attempt to protect small online merchants – those that stand to be most hurt by the Wayfair case. Look for it to be the model for legislation in other states.
But there are a few large, non-Streamlined states – states with complex sales tax systems. States like California or New York. These states could decide to make only minor changes to their laws while still requiring out-of-state sellers to collect. If litigation does ensue, it will likely come from a state where compliance complexity and cost are high and the economic impact on the collector is significant.
But one this is clear, the states will take action. In NCSL’s statement on the decision, Senator Peters says, “For states, today is just the beginning. We’ve waited 26 years. Good tax administration is good public policy and state officials look forward to working with all stakeholders in the coming months as we move forward to level the playing field for all of our nation’s retailers.”
About the Author – Michael O’Brien is the founder and principal of MOB Advocacy. He has more than ten years experience as a state and local lobbyist. Michael has lobbied governors, mayors, legislators, state and local agencies and regulators in more than 40 states.
About MOB Advocacy – MOB Advocacy is a full-service, nationally-scoped state and local government relations firm. We design and implement legislative, regulatory and procurement solutions tailored to meet any organization’s unique needs and specific goals.
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