Supreme Court Issues Major Online Sales Tax Ruling

Last week, the U.S. Supreme Court overturned a 1992 Supreme Court ruling (Quill v North Dakota) which held that businesses were not required to collect sales taxes unless they have a substantial connection to the state such as a physical presence in that state. This will potentially have significant impact on our clients who have sales and/or activity in multiple states. States are now able to levy taxes on sales of goods and services regardless of whether the seller has a physical presence in the state. Any retailer or service provider will likely need to update internal accounting systems to respond to the changing sales tax landscape.

The short-term outcome of this opinion is that states will likely act quickly to amend their sales tax statutes to reflect the holding of the Court and begin levying sales and use tax on any interstate commerce that has substantial nexus. South Dakota’s law required out-of-state resellers to collect and remit sales tax when there were $100,000 in gross revenue from sales in South Dakota or completed more than 200 sales annually in South Dakota. This is important because even though the thresholds were not specifically noted as a mandated threshold by the Court, this threshold was enough to protect small businesses from becoming burdened with sales tax compliance. Louisiana and North Dakota just passed an exact copy of the South Dakota law using $100,000 and 200 transactions and other states will likely change their laws to mirror the South Dakota law.

Longer-term, states may begin pushing the envelope of the requirements of the holding, trying to stretch the definition of substantial nexus. While the door is open for states to require sellers without a physical presence to collect and pay sales taxes, states may still be limited on their ability to levy state sales taxes on interstate commerce.

We will keep you informed as more analysis and the impact of the Supreme Court decision becomes available. Please contact our office if you have any questions.

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