Alerts and Updates
Supreme Court to Review Sales Tax Physical Presence Standard; More States Pass Reporting Laws on Remote Sellers
January 16, 2018
Even without the Supreme Court’s new review of the physical presence test, internet, catalog and other remote sellers of merchandise should also be worried of the new reporting laws that a number of states are passing.
Quill ’s Physical Presence Test
The Supreme Court of the United States has accepted for review the case of South Dakota v. Wayfair, Inc., et al, in which the state of South Dakota has challenged the continued viability of its 1992 Quill Corp. v. North Dakota decision that required some physical presence of a remote seller in a state before a state could impose its sales tax collection obligations on the seller. The Supreme Court in 1992 held it was up to Congress to change the test. In this new case, the South Dakota Supreme Court held that South Dakota’s attempt to legislatively override Quill was in violation of the law. By hearing the case, the U.S. Supreme Court will now decide whether to change the law or continue to allow the physical presence standard to stand, until and unless the Congress decides to change it. This decision could have far-reaching effects on interstate commerce, especially impacting internet sellers.
New State Reporting Requirements
Even without the Supreme Court’s new review of the physical presence test, internet, catalog and other remote sellers of merchandise should also be worried about the new reporting laws that a number of states are passing. So far, six states have passed laws that require remote sellers (sellers with no office, traveling salesmen, property or other physical presence in such state) that have not registered to collect sales/use tax for such states, to send notices to their customers of the sales/use tax not collected, and to then file annual reports with such states identifying their customers and detailing their sales of tangible personal property to such customers.
Notably, another five states have passed notice-only laws in which the remote seller must notify the customer of the sales/use tax liability. The sales threshold for remote sellers to be subject to these laws is very low—for example, in Washington state the threshold is $10,000 in annual sales. Alternatively, under these laws the remote sellers can register for and start collecting sale/use taxes for the states—the option the states surely prefer and the obvious underlying purpose behind the notice and reporting laws. Failure to comply with these new requirements will subject the remote sellers to substantial state penalties.
The current states with remote seller laws with full notice and reporting requirements are Colorado, Alabama, Washington, Louisiana and Rhode Island, while Pennsylvania’s law goes into effect February 1, 2018. The states of Oklahoma, Tennessee, Vermont, South Dakota and Kentucky only have notice to customer laws, but no state reporting. Because this new tax enforcement regime (when it was applied by Colorado) was blessed by the federal appeals court in Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129 (10th Cir. Feb. 22, 2016) (cert. denied), these states are anticipating that they can enforce these new regulatory requirements against remote sellers. Many other states are also considering imposing these laws.
As a result of the Supreme Court’s taking up the Wayfair case and these new regulatory requirements, remote sellers should take caution. Not only may the physical presence test of Quill possibly disappear, even if it survives sellers in a growing number of states will still be faced with whether to register to collect sales/use tax in these states or follow these states’ new regulatory rules that may require the disclosure of their customers and possibly filing reports of their sales. One thing seems certain however: 2018 will be a challenging year for remote sellers.
For Further Information
If you have any questions about this Alert, please contact Stanley R. Kaminski, any other member of our State and Local Tax Practice Group or the attorney in the firm with whom you are in regular contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.