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States Granted Broad Discretion to Determine Nexus for Online Sales Tax Collection

On June 21, 2018, the U.S. Supreme Court reversed its course regarding the previous system it established to determine when businesses conducting online sales are required to collect sales tax. In 1992, the Supreme Court ruled in Quill Corporation v. North Dakota that the Constitution bars states from requiring businesses to collect sales tax unless they have a substantial connection to the state (i.e. physical presence). As a result of the Quill decision, online retailers were able to grow exponentially without being forced to navigate the complex patchwork of state and local tax codes when selling goods nationwide. With the meteoric rise of ecommerce, brick and mortar stores complained that they are at a severe competitive disadvantage to secure sales since sales tax was not required to be levied in most instances.

In South Dakota v. Wayfair Inc., the Supreme Court appears to try to level the playing field between online and brick and mortar sales business. The Court’s holding grants states broad new authority to require online retailers to collect sales taxes on products sold directly to consumers. While the Court’s opinion eliminates the physical-presence test used under the previous system, it failed to establish a new bright-line rule about when a state’s sale-tax collection law might impose an impermissible burden on interstate commerce. As a result, it is likely that this opinion will result in a sudden surge of new state laws on this matter as well as a push for a uniform federal statute to clearly lay out the framework of exactly how and when states are permitted to collect sales tax.

If your business conducts online sales to customers in any state for which you currently do not collect sales tax, it is imperative that you begin a thorough examination of these sales in order to ensure that you will be able to comply with what is surely to be a myriad of new state laws on this issue. Contact our office to discuss how this drastic shift in ecommerce will impact you and your business.