Redpath Insights


South Dakota v. Wayfair, Inc.: Interstate Taxes in the Supreme Court

by Teri Grahn, CMI

January 25, 2018 — The Supreme Court has agreed to consider the case of South Dakota v. Wayfair, Inc. It is a challenge to their prior decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a case that established “physical presence” as a requirement before a company was required to collect and remit sales tax.

South Dakota v. Wayfair, Inc. could culminate in a ruling that all e-commerce merchants and other out of state sellers will have to collect sales taxes on all transactions beyond a specific threshold.

South Dakota already has law SB 106, intended to revisit and revise Quill Corp. v. North Dakota. Quill v. North Dakota determined that imposing a tax on sellers without “nexus” (or “substantial physical presence”) in a state, e.g. a farm in Wisconsin shipping cheese to Illinois, would be a burden on businesses and discourage interstate commerce.

That 1992 decision pre-dated the sustained rise and reach of e-commerce powerhouses like Amazon, eBay, Overstock, and Wayfair. Modern commerce has in some instances bridged the gap between retailer and end-consumer such that a single click sends a box to you (Amazon one-click), and in others allowed all kinds of manufacturing and distribution to cross state and national boundaries (air freight, increases in logistic efficiency, free-trade agreements, and a common platform—the internet—over which to conduct e-commerce).

RELATED: On Tuesday, January 23rd CNBC reported that Amazon notified its marketplace sellers that the company has agreed to hand over important merchant information to the state of Massachusetts — including their federal tax ID numbers and the estimated value of inventory stored in Amazon's warehouses in that state.

States like South Dakota, Massachusetts, and others don't want to miss out on tax revenues any longer - the Government Accountability Office estimates that $13 billion was left on the table in 2017 alone. With laws like SB 106, they are seeking to capture tax revenue once again.

SB 106 requires remote sellers with no physical location in South Dakota to remit sales tax and follow all procedures of the law as if they have a presence in the state if they meet one of two criteria in the previous calendar year or the current calendar year.

  1. The remote seller's gross revenue of sale of tangible property, any products transferred electronically, or services delivered into South Dakota exceeds $100,000
  2. The remote seller has 200 or more separate transactions tangible property, any products transferred electronically, or services delivered into South Dakota.

Shortly after the law was passed, the law was challenged by Wayfair, Inc. et al. and subsequently the state has now sought agreement from the court system that the measure was constitutional. Other states and lawmakers are keeping their eye on this case as well as it's an issue that has far-reaching implications. Furthermore, justices Neil Gorsuch, Clarence Thomas, and Anthony Kennedy have already indicated that they feel the prior ruling has put states at more of a disadvantage than anticipated at the time.

Redpath's Sales and Use Tax Service Area Leader Teri Grahn, CMI is following new developments in this case, expected to be heard by the Supreme Court a few months from now.

Teri Grahn, CMI

Teri Grahn, CMI

Teri Grahn, senior manager is the sales and use tax service area leader and is a certified member of the Institute for Professionals in Taxation. She educates and assists commercial entities with multi-state sales and use tax procedures and compliance, and works with clients to review internal records and practices and educates their staff on processes. She also helps clients navigate the unknowns of entering new states and jurisdictions by researching specific products and services, system and invoice set up to remain compliant with future transactions. Teri also supports clients through sales and use tax audits by investigating assessments and answering questions throughout the process. Teri works with clients in various industries including manufacturing and distribution, construction and real estate, and technology. Prior to joining Redpath and Company in 2003, Teri performed sales and use tax audits for the Minnesota Department of Revenue for 9 years.