Due to a recent Supreme Court decision, internet sellers may now be required to collect and remit sales taxes in states in which they have no physical presence.
In the landmark case of South Dakota v. Wayfair, Inc., decided on June 21, the Court overturned its prior decisions that had provided that an out-of-state seller must have a physical presence in a state in order for the seller to be required to collect and remit taxes in that state.
The Court upheld a South Dakota Act that requires out-of-state sellers that, on an annual basis, deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods or services into South Dakota to collect and remit sales tax in South Dakota.
The Court explained that, although a tax must apply to “an activity with a substantial nexus with the taxing state,” the nexus was sufficient in the case at hand because of the large virtual presence and quantity of business conducted by Wayfair, Inc., Overstock.com and Newegg, Inc. This is despite the fact that none of these companies had employees or real estate in South Dakota.
As a result of this decision, internet sellers who have not previously collected sales tax from customers located in states where the sellers do not have a physical presence may now be required to do so. The application of this decision to a particular seller will depend on the laws in effect in the relevant states and/or jurisdictions and the analysis thereof will likely be extremely nuanced. Federal, state and local lawmakers may ultimately enact legislation in response to the Wayfair decision and the decision and any subsequent legislation may give rise to further Constitutional challenges. As a result, the ultimate impact of this decision is not entirely clear. Internet sellers should not hesitate to seek legal advice regarding their specific sales tax obligations and should continue to follow developments on this issue.
By Katherine A. Heptig & Sarah Schachne Hirschfeld of Rivkin Radler