In 1992, the US Supreme Court decided in Quill Corp. v. North Dakota that state sales and use tax were only imposed to those retailers that had physical presence (“nexus”) within a particular state. Nexus was usually established by having an office or a warehouse within a state’s boarder.
With the advance of technology and growth in e-commerce, online sellers with no physical presence in a state enjoyed a clear advantage over in-state retailers since they did not have to collect sales tax. Wanting to increase their revenue and provide fair competition to its local sellers, several states started to claim that the nexus in Quill could be satisfied through actions other than establishing a physical office or warehouse therein.
The definition of “nexus” has been the center of many battles between states and online retailers, bringing several lawsuits on the issue. One of these lawsuits, South Dakota v. Wayfair, finally reached the Supreme Court. On June 21, 2018 the SCOTUS reversed its decision in Quill and ruled that states can require online sellers to collect state sales and use tax on their transactions even if they have not established a physical presence in that state.
This decision will dramatically impact online shopping as we know it. The giants of e-commerce might not be so impacted, as most of them already have some sort of presence in most states. The big hit will be on small to medium size online sellers, who will have to collect sales and use tax in every state where their customers are located. This could force several of them to close their doors or to limit their operations to certain states as this new obligation will come with several reporting requirements, paper tracking and audit risks.
If you are a small or medium size online retailer, do not hesitate to contact an experienced tax attorney such as Brunoro Law to assist you understand your new obligations and discuss any possible tax planning that might be available to your business.