United States Supreme Court Rules for State in High Profile Remote Sales Tax Case

In a 5-4 decision, the United States Supreme Court ruled for the state of South Dakota against a challenge brought by online/remote retailers.   The decision in South Dakota v. Wayfair, et al reverses a decision by the South Dakota Supreme Court.   The opinion overturns the Court’s earlier opinions from 1992 in Quill and 1967 in Bella Hess .   The Wayfair opinion upholds the South Dakota remote sales law against dormant commerce clause challenge holding “The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides.”

This is a big victory for traditional brick-and-mortar businesses as it potentially levels a playing field.   Taxing jurisdictions will now be allowed to require out-of-state/on-line sellers to collect state sales taxes with less of a direct “nexus” to the taxing jurisdiction.

The majority opinion recognized the legitimate state interests in collecting taxes and believed the court had strayed to far in interfering with their attempts to collect taxes.  The Court further noted that the power to regulate Commerce is a core power of Congress but the majority believed that the Court upset this balance by its Bella Hess and Quill precedents.  A theme of both the majority and the minority opinion is that previous Supreme Court action “out of turn” has made it harder for Congress to legislate and address the issue of taxing ecommerce.

I believe there will three direct and predictable forces unleashed by this decision.   First, the court ruled for the South Dakota law but not all laws.   There will first be more litigation by retailers trying to limit the application of the Wayfair opinion to prevent speculative tax claims from a local jurisdiction.  A second immediate action will be your state tax authorities promulgating rules or legislation to grab tax from out of state sellers.  This may include cities, counties or other special tax boards.  And finally, with 50 different state tax regimes as well as myriad of numerous local jurisdictions promulgating tax rules, this flurry of new tax rules may soon force businesses to run to Congress to pass a federal fix so there is a one-size-fits-all-solution.   There have been many bills to address this but not enough political consensus, perhaps this decision forces eventual consensus.

Although this case does not address alcohol regulation, it is expected that both sides will find language that serve their arguments for future dormant Commerce Clause cases that continue to work its way through the courts.

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