The Supreme Court of the United States in a 5 to 4 decision has just overturned Quill Corp. v. North Dakota, which prevented individual states from requiring out-of-state retailers to collect sales taxes from customers if they did not have “substantial nexus” with the state (essentially employees or property). For years states have missed out on collecting MILLIONS of dollars in sales tax because online retailers could rely on this standard to limit their economic nexus with a state. The case challenged South Dakota’s application of its sales tax to internet retailers who sell into South Dakota but have no property or employees in the state. The decision penned by Associate Justice Anthony Kennedy came down on the side of the states granting them greater power to require out-of-state retailers to collect sales tax on sales to in-state residents.
The Supreme Court’s landmark decision in Wayfair v. South Dakota will have a tremendous impact on businesses engaged in e-commerce. Many businesses engaged in e-commerce will now have to revise their business models to collect and remit sales tax on goods sold via the Internet, which will include upgrading technology to properly calculate their tax obligations. These businesses will also now have to grapple with the collection of customer data and the cybersecurity risks associated with the collection of customer data.
Tennessee, like the South Dakota statute at issue in Wayfair, sought to base the collection of sales tax on the businesses’ economic activity in the state. However, this ruling does not mean states now have unlimited power to collect sales tax. Despite the physical presence test no longer applying, the Court made it clear the Commerce Clause remains in place and can still protect companies from any undue burdens on interstate commerce. In other words, businesses can still challenge a state's nexus law, but the challenge cannot solely be based on the physical presence test. The Tennessee General Assembly will undoubtedly be re-examining current tax laws in light of the Wayfair decision.
