Cross Border State Sales and Use Taxation After South Dakota v. Wayfair: A New Paradigm for E-Commerce
For over 50 years, U.S. Supreme Court precedents held that state sales taxes could not be constitutionally applied against retailers with no physical presence in the taxing states. As a result, many states implemented use tax laws to supplement sales tax laws, essentially requiring each resident consumer to self-report and pay taxes on purchases made from out of state retailers. However, these use tax laws were largely ignored. Moreover, with the advent of online retail (“e-tail”), many sales on which states previously collected sales tax from local stores essentially converted to “tax-free” sales because many online sellers (“e-tailers”) had no physical nexus to the states in which the products were delivered. As online sales continued to take up a larger percentage of all purchases, states struggled to secure sales and use tax revenue consistent with the physical nexus standard. In recent years, many states implemented laws that required e-tailers to collect sales taxes not based upon physical presence, but upon annual dollar value or number of sales into the states (called, “economic nexus”). However, enforceability of the economic nexus laws was questionable in light of past U.S. Supreme Court decisions. Additionally, with more than 9,600 sales taxing jurisdictions with varying rules and rates, many argued that compliance would create an undue burden on interstate commerce in violation of the Commerce Clause of the U.S. Constitution. South Dakota was one of the states to implement an economic nexus law, and it was challenged on constitutional grounds. In June 2018, in the matter of South Dakota v. Wayfair, et al., the U.S. Supreme Court held in favor of South Dakota, overturning the physical nexus standard and allowing economic nexus sales taxation of online sales based upon dollar value or number of sales alone. This article summarizes state sales and use tax laws, prior Supreme Court precedent, and the South Dakota v. Wayfair decision. It then examines current economic nexus and similar laws, compliance issues, and possible solutions for the e-tailer client.