In Quill, the Supreme Court stated it was up to Congress to change the physical presence test. The question now before the Supreme Court is whether it should abandon that precedent or continue to leave the issue up to Congress as it had done in the past.
The manner in which small businesses can easily solicit orders and sell merchandise over the internet may soon end. In its place, the Supreme Court may require a more regimented and costly scheme that may force many small businesses to go out of business or limit their sales to certain states. It all depends on the outcome of a recent case in the Supreme Court called South Dakota v. Wayfair, Inc. While Wayfair itself is not a small business, a decision in this case could adversely impact many small businesses that argue, like Wayfair, that they should have some presence in the state (and thus be a user of state services) before a state can impose a tax or tax collection duty on them. On the other hand, many larger businesses, local nonweb businesses and the states believe all businesses, whether in a state or not, should collect sales/use tax to even the playing field, and if some small businesses can’t hack it or handle the administrative or financial cost, so be it. This is the background on the issues at play in Wayfair.
On April 17, 2018, the Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc. The issue in Wayfair centered on whether the state of South Dakota could force a non-South Dakota retailer of merchandise with no physical presence in the state to collect state sales/use tax when making sale from outside of South Dakota for delivery by common carrier to a South Dakota customer. Under decades-old Supreme Court precedent, as last explained in the 1992 Quill Corp. v. North Dakota case, South Dakota’s actions were illegal since Wayfair did not have any physical presence in South Dakota. In Quill, the Supreme Court stated it was up to Congress to change the physical presence test. The question now before the Supreme Court is whether it should abandon that precedent or continue to leave the issue up to Congress as it had done in the past.
During the oral argument, the justices understood the substantial impact that their decision will have on the country and interstate commerce generally. They debated whether the issue should remain with Congress as they had emphasized in their earlier Quill decision. Some of the justices believed Quill was wrongly decided and they should change the law, while others cited stare decisis as a reason to keep the law as is, since it has been relied upon for decades. Some of the justices cited the cost of nationwide compliance with a law change and its possible effect on small businesses. Prospective versus retroactive application of their decision was also debated, as well as whether just one sale into a state would be enough to create tax nexus if they changed the law. All in all, the oral argument did not indicate a likely decision. But, whatever the decision, the outcome of this case will no doubt fundamentally change in some manner sales/use tax nexus in the country, and will impact hundreds of thousands of current and future businesses that sell over the internet, by catalog or over the phone. And, depending on the decision and how the states interpret the ruling, it could mean the end of small internet businesses that sell nationwide using the worldwide web.
A decision is expected by late June. Duane Morris attorneys will continue to monitor developments in this case.
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