On Thursday, June 21, the U.S. Supreme Court ruled in favor of South Dakota in South Dakota v. Wayfair. The precedent established in the 1992 Supreme Court case, Quill Corp. v. North Dakota requiring a physical nexus in the state in order for states to demand payment of sales taxes is dead.
What happens now?
In Iowa, Governor Reynolds signed a tax bill on May 30 that included the implementation of sales tax on internet sales. With the Wayfair decision, the Iowa Department of Revenue can now begin drafting rules to apply Iowa’s internet sales tax effective January 1, 2019, requiring non-resident retailers to collect and remit sales taxes to Iowa upon merchandise sold and delivered into Iowa.
We anticipate other states will now rush to apply sales tax to internet sales. Each state can also adopt and enforce comparable sales tax collection and payment requirements upon Iowa retailers selling in their states.
The question in South Dakota v. Wayfair was whether South Dakota may require retailers without a physical presence in South Dakota to collect sales taxes from South Dakota customers and remit those tax proceeds to the South Dakota Department of Revenue.
In a 5-4 split decision, the majority found that in e-commerce, physical presence of a retailer within a taxing state is no longer necessary to have “substantial nexus” with the taxing state.
In other words, if a retailer knows how to mail merchandise into a state, then it’s not too much to require the retailer to figure out how to mail a check to the same state’s department of revenue.
The decision allows states to tax the internet to create a level playing field between internet retailers and local bricks-and-mortar retailers. The justices noted that today, about 89% of Americans have internet access, but when the Court decided Quill in 1992, less than 2% of Americans had internet access. Similarly, internet sales in the U.S. were $453.5 billion in 2017, but mail order sales in the U.S. were only $180 billion in 1992.
Unknown Aspects and Questions
One aspect left undecided by the majority is whether the South Dakota law could otherwise violate one of the other three dormant Commerce Clause tests set forth in Complete Auto Transit v. Brady (1997):
- fair apportionment
- fair relationship to state provided services.
Like South Dakota, Iowa’s internet sales tax remains subject to this same scrutiny.
The four justice dissent was led by Chief Justice Roberts. He argued that given the importance of e-commerce to the national economy, Congress should be allowed to exercise its Commerce Clause power to adopt a uniform set of rules for states to follow in taxing the internet. He notes, “[t]he burden will fall disproportionately on small businesses."
Perhaps the most significant remaining question is whether Congress will step in to limit state taxation of internet sales, and whether it would happen before the Iowa law’s January 1, 2019, effective date. In this election year, probably not.
Retailers should consider getting involved soon to lobby the Iowa Department of Revenue as it drafts the new rules. Those Iowa retailers selling goods via in the internet in other states should also consider talking with a tax attorney about how this decision and state laws will impact their sales tax collection and payment requirements.