Out-of-State Sellers Can Now Be Required to Collect and Remit State Sales Tax Even When They Don’t Have a Physical Presence in the State

In a recent 5-4 ruling, the Supreme Court, in South Dakota v. Wayfair, abandoned its physical presence standard established in National Bella Hess, Inc. v. Department of Revenue of Ill. and Quill Corp.  v. North Dakota. The physical presence standard prohibited states from imposing sales tax collection and remittance requirements on out-of-state sellers that lacked a physical presence in a respective state. The rejection of the physical presence standard allows states’ legislatures to move forward with establishing regulations that impose sales tax collection and remittance obligations on some out-of-state sellers, provided that it is done in a manner that does not unduly burden interstate commerce.

While the Court remanded the matter to the lower court for final disposition without affirming South Dakota’s specific law, the rejection of the physical presence standard marks a significant change in how the Court analyzes interstate taxation laws. It is still unclear how each state’s legislature will act under this decision with respect to out-of-state sellers selling goods within their state, but given that 41 states, two territories and Washington D.C. all petitioned the Court in some form to overturn the physical presence standard it is likely that most states will soon draft legislation to take advantage of this change.

Regarding undue burden, the South Dakota law that was before the Court sets a threshold for applicable out-of-state sellers, limiting enforcement to those out-of-state sellers that deliver more than $100,000 in goods or services in the previous or current calendar year in the state or engage in 200 or more separate transactions in the previous or current calendar year for the delivery of goods or services into the state. Therefore, out-of-state sellers doing a very limited amount of business in South Dakota would be exempt.

South Dakota has also implemented the Streamlined Sales and Use Tax Agreement (SSUTA), which provides for a uniform way to collect and remit sales and use tax for e-commerce retailers for sellers selling into multiple states to lower the burden and cost of multi-jurisdiction sales tax compliance. This type of regime to address any claim of undue burden on interstate commerce seems a likely path for other states to impose these responsibilities on vendors delivering goods within their state.