Today, by a split 5-4 decision, the United States Supreme Court held in favor of the State of South Dakota, ruling the state may impose a sales tax on certain taxpayers without a physical presence in that state. In South Dakota v. Wayfair, the Court analyzed the state’s sales tax law that imposes sales tax duties on sellers with in-state sales in excess of $100,000, or with 200 or more sales in the state. In its analysis, the Court revisited the rationale of its long-standing decision in Quill v. North Dakota, which stood for the proposition that states are prohibited from imposing sales tax obligations on businesses without a physical presence in the state. In the Wayfair decision, the Supreme Court effectively overturned that rule, at least with respect to the South Dakota sales tax.
It should be underscored that the majority opinion noted “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce,” including (1) a safe harbor for limited business activities in the state, (2) a prohibition against retroactivity on the obligation of sales tax remittance, and (3) South Dakota was one of 20 states that adopted the Streamlined Sales and Use Tax Agreement. Whether the Wayfair decision will more broadly apply remains uncertain. Immediate reaction has been mixed, with views ranging from “this will have limited reach” to “businesses should prepare to collect and remit sales taxes everywhere they do business.” Of course, the latter view assumes states, such as Oregon that do not have a broadly applicable sales tax, will move to enact such a tax.
Looking at it from a Northwest perspective, you can see how a broad application of the Wayfair decision can impact local businesses. For example, Washington businesses should be able to react to the imposition of the obligation to collect and remit sales tax without too much of hassle because they are currently equipped to handle Washington’s sales tax. On the other hand, Oregon businesses – especially those that have historically operated outside of sales-tax jurisdictions – may have short-term business disruptions as they move to handle sales tax collection and remittance.
What happens next will remain a live topic in the days and weeks to come, and sellers of goods and services should monitor this closely. At a minimum, out-of-state businesses transacting sales in South Dakota that meet the statutory requirements should take immediate steps to become compliant with that state’s sales tax law. Other businesses may want to start looking at business improvements necessary to begin collecting and remitting sales taxes should other state and local jurisdictions look to implement or expand sales taxation.
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