Tax Collection in the Modern Age: Location Does Not Prevent Taxation
While the collection of sales tax has always been a contentious issue, some elements of collection requirements were much clearer in the past due to federal court precedents than they will be going forward. The increasing popularity of online retail has created a legal and pragmatic conundrum for state taxing authorities. A recent supreme court ruling to overturn a former federal court precedent is expected to drive major changes through state legislation with regard to out of state retailers’ requirements to collect and remit sales taxes.
It was established in the National Bellas Hess, Inc. v. Illinois Dept’ of Revenue (1967) case that a physical presence is required for a state to impose tax collection and payment upon sellers. Decades later, the issue was challenged again in the case Quill Corp. v. North Dakota (1992). Quill is a corporation that sells office equipment and supplies to customers in states outside of its state of incorporation, Delaware. At the time of the case, Quill reported significant revenue generated from selling to clients in North Dakota. The state attempted to compel Quill to collect and pay state sales taxes, arguing that floppy disks containing Quill’s software constituted a physical presence in the state. While the Supreme Court ruled in Quill’s favor, the opinion left room for interpretation and for states to bring forth similar cases to challenge the issue of collecting sales tax from online transactions.
The sales tax collection debate resurfaced again in the case of South Dakota v. Wayfair, Inc. Compliance with sales tax regulation was so low that the state estimated it lost $50 million to potential sales-and-use-tax revenue from out of state vendors conducting business in the state but not collecting sales tax. When the case was brought before the South Dakota Sixth Judicial Circuit, the retailers were granted a Motion for Summary Judgement in their favor since the previous Quill precedent was still in effect. The state then appealed the decision to the South Dakota Supreme Court. At the South Dakota Supreme Court trial the State conceded its case, and requested that the Court affirm the lower courts decisions. The quick ruling allowed South Dakota to take the issue to the Supreme Court in a timely manner.
The Supreme Court ruled to overturn the previous Quill decision, citing that changing economic and technological advances have created a different legal and social environment. They concluded a lack of physical presence is not enough to avoid collecting sales tax, and that the past law interpretation created market distortions because it “judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s residents.” Furthermore, they noted the Quill interpretation discouraged interstate commerce because it gave an incentive to companies to avoid owning any physical locations in other states as a way to avoid taxation.
The recent decision allows for purchases from out-of-state vendors to be taxed, regardless of whether or not they have a physical presence in the state. If your company is conducting business in other states and has not reviewed compliance requirements, now is the time to review interstate commerce activities and make determinations on the company’s tax reporting, collection and remittance obligations. Our State and Local Tax team specializes in compliance issues such as these. If you have questions, please contact us today!