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U.S. Supreme Court to Consider Overturning Physical Presence Nexus Standard

February 13, 2018

Most businesses selling property across state lines realize that they have no obligation to collect or remit a State’s sales or use tax on the sale unless the business has a physical presence in the taxing State. Few businesses, however, realize that the reason for this restriction is the United States Supreme Court’s 1992 decision in Quill Corp v North Dakota, 504 US 298; 112 S Ct 1904; 119 L Ed 2d 91 (1992), in which the Court held that the Commerce Clause requires a taxpayer to have a physical presence in a state before it can be forced to collect and remit sales or use taxes.  

On January 12, 2018, the United States Supreme Court granted the State of South Dakota’s Petition for a Writ of Certiorari challenging the continued validity of the physical presence nexus standard in South Dakota v. Wayfair, Inc., et al., (U.S. Supreme Court Docket No. 17-494). In Wayfair, the State of South Dakota argues that the physical presence requirement of Quill is outdated and should be overturned. The State argues that the explosion of internet sales has resulted in states losing out on significant tax revenues and that modern computer programs make state tax compliance much easier than when Quill was decided. The State also argues that the Quill rule gives out-of-state sellers an unfair advantage over traditional brick and mortar stores located in South Dakota.  

Briefing in Wayfair will occur this spring and summer with multiple amicus briefs expected. The Supreme Court will likely hear arguments in the fall term and decide the case by June 2019. If the Supreme Court reverses Quill, it will be a sea change in sales/use tax collection obligations by multistate sellers.  

Action Item for Taxpayers

Businesses should be prepared for the possible reversal of the Quill case and also for new sales/use tax collection obligations in many states. 

New Reporting Requirements for Businesses Making Remote Sales

Many states have enacted an “end run” around Quill by enacting reporting requirements for sellers exempt from tax collection. For example, Colorado imposed notice and reporting requirements on retailers who sell more than $100,000 in products to consumers in Colorado, but do not collect and remit Colorado sales tax. These obligations require the retailers to:

  • Notify Colorado customers that the retailer does not collect sales tax and that the purchaser must self-report and pay such tax to the Colorado Department of Revenue (“DOR”);
  • Provide each Colorado customer with an annual report of their purchases and inform the customer that he or she must report and pay taxes on such purchases, and that, if the purchasers were greater than $500, the retailer must report the customer's name and total purchase to the DOR; and
  • Provide the DOR with an annual report concerning each of the retailer's Colorado customers, including the customer's name, billing and shipping addresses, and the total amount of the customer's purchases.

These reporting requirements were found to be lawful in Direct Mktg. Ass’n v. Brohl, No. 12-1175 (10th Cir. Feb. 22, 2016). Since that decision, numerous other states have imposed similar reporting requirements, including Alabama, Louisiana, Rhode Island, Washington, and Vermont. South Carolina and Kentucky have laws that require internet websites, catalogs, and invoices to remind buyers of their obligations to pay state use tax on their purchases. This is an area of law that is rapidly changing, and legislative bills imposing reporting requirements are pending in numerous other states.

Action Item for Taxpayers

If you are selling tangible personal property to other states and not collecting and remitting sales/use taxes to the destination states, be sure you are complying with those states' reporting requirements to avoid penalties and enforcement actions.

Please contact one of the other tax attorneys in Honigman’s SALT Practice Group for guidance. 

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