Life just got a whole lot tougher for eCommerce sellers. On Thursday, June 21, the U.S. Supreme Court in a 5-4 decision of the South Dakota v Wayfair case overturned the physical presence requirements of both the Quill and National Bellas Hess cases. (National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992))This is a huge win for the states. For sellers, it is a tremendous blow. Depending on a seller’s sales volume or the number of transactions, a seller could potentially have to collect tax across the country.
States have always required sellers to collect sales tax, once the seller has a link or connection with a state. We call this link or connection nexus. Up until now, there had to have been some sort of physical component of this link to create nexus. Not anymore.
Now nexus can be based on a number of sales or transactions - and nothing more. We call this an economic nexus. Per this decision, we now know that $100,000 in sales or 200 transactions a year is a substantial nexus. However, could $10,000 or 20 transactions be considered substantial nexus? Maybe. We will have to wait and see what the states do.
There are in excess of 20 states that have passed economic nexus statutes, rules, or regulations in anticipation of this ruling. Many of these states will start enforcing right away. However, there were 41 states plus DC that petitioned the court to repeal Quill. It will be interesting to see what these additional states will do. Will they copy SD or will they try lower thresholds?
This is bad news for sellers for so many reasons, but perhaps the worst is that states could go after sellers for back taxes, penalty, and interest. The court basically said that the prior courts were wrong about physical presence and overturned both the Quill & Bellas Hess cases. This means that states could go back to 1992 or even 1967. A state can’t actually go back before you started selling, and most states have initially implied they will not go backward, but I think we may see a few try to go back 1, 2 or 5 years.
Even if states don’t go backward, sellers now have to look at their sales volumes by state and/or start counting transactions. The states don’t make this easy as each state has its own thresholds. We will be posting those thresholds in our next post.
In addition, the states did not say that economic thresholds are the only way to create nexus. All other nexus standards still apply. So we still need to consider inventory, the activities of employees and even third-parties including affiliate programs in addition to these new economic thresholds.
I feel the states believe they have been given the green light to start pursuing companies aggressively. After today’s decision, I believe that states will now step up their enforcement efforts. I think we will see the discovery units of each state working overtime and adding resources.
While I cannot tell the future, if we are waiting for Congress or Amazon to solve our problems we might be waiting a long time. Congress first started looking at nexus in 1959 when they passed The Interstate Income Tax Act of 1959. They passed this as a temporary solution to a Supreme Court decision and said that nexus is so complex they have to study it before implementing a final solution. It is now 59 years later and we are still working with the temporary solution. So a do-nothing Congress is nothing new, at least when it comes to nexus. Perhaps we are better off without Congress getting involved. I am not a big believer that Congress can actually solves all our problems. There are always unintended consequences. Look at how well Healthcare or Social Security have turned out. So I am not waiting on any solutions from Congress, they may come, but I am not holding my breath.
As to Amazon collecting the tax for third-party sellers, I think that will eventually happen. However, it could take years for Amazon to start collecting the sales tax in every state, just as it took years for them to start collecting their own sales. Many issues will need to be settled and/or deals cut with states. And Amazon collecting sales tax is not a cure-all. It can actually make matters worse as sellers in WA are beginning to realize. Amazon is only responsible for sales tax going forward and they do not pay the B&O tax, just the sales tax. The B&O is a second tax on the sales tax return. Sellers are responsible for the B&O and all past exposure.
This decision was a big surprise to me and these are my first impressions. Over the next couple of days, there will be many such as myself providing additional information and comments on state reactions, actions, and potential paths forward. We will see many webinars, podcasts and much more written material. At the very least we need to start reviewing our sales volumes and transactions by state. There are some great tools out there that can make this task easier. Feel free to contact me for recommendations.
After your sales and transactions are determined by state, sellers should review the different state requirements. If you have nexus, and what you sell is taxable and your sales are material, you should consider registering to collect and remit sales tax.
If you have any questions at all please let us know, we offer free consultations.
Other recent “Small Business E-Commerce” posts by Michael Fleming:
- With Quill Dead You Could Now Have Sales Tax Nexus Everywhere
- Do Online Sellers Need to Collect Sales Tax? 5 Key Factors!