In June, the Supreme Court ruled in favor of the plaintiff in South Dakota v. Wayfair, clearly overturning the 1992 Quill v. North Dakota decision, and firmly eliminating the physical presence test for online retailers. But the Court also added some uncertainty for many corporate legal departments.
As Corporate Counsel reports, the Court ruled 5-4 in South Dakota v. Wayfair, finding that online retailers don’t have to have a physical presence within states in order for states to collect taxes from them. The National Law Journal called this ruling a “billion-dollar boon for states.”
The Court also ruled that South Dakota’s business tax model, which is based on a minimum of sales or revenue, remains legal. Among the other features of the state law the Court highlighted was the adoption of the Streamlined Sales and Use Tax Agreement, which offers members, currently 20 states, the same sales-and-tax rules.
While, says Corporate Counsel, the court’s decision delivers some clarity for retail legal departments attempting to comply with thousands of tax laws, challenges and uncertainty remain for departments dealing with jurisdictions that are not part of interstate agreements.
Size also matters. “[T]he smaller the business, the harder the hit in terms of compliance cost burdens,” said Chris Wilson of Waller Lansden Dortch & Davis. Wilson added:
“Unlike South Dakota, many states do not participate in the Streamlined Sales and Use Tax Agreement, and the Supreme Court did not specifically say what amount of sales or activity within the state would satisfy due process and commerce clause concerns, nor did it address potential retroactivity issues.”
So what can legal departments do until the uncertainty is resolved? Wilson advises examining due process arguments, which should include assessing in-state contacts and quantifying tax exposure.