On June 21, 2018, the United States Supreme Court (“SCOTUS”) in Wayfair holds in a 5-4 decision to abandon the physical presence nexus standard -- overruling Quill and National Bellas Hess. In the absence of Quill and National Bellas Hess, the 4-prong-test Complete Auto is controlling precedent for Commerce Clause jurisprudence. Wayfairlimits its ruling on South Dakota Act to Complete Auto’s first prong - Substantial Nexus. Whether the act satisfies the other three prongs is remanded to the South Dakota Supreme Court. Although it is premature to report “South Dakota’s law is constitutional under Complete Auto”, South Dakota’s Act has been ruled to satisfy the first prong of the Complete Auto and is reasonably expected to be ruled fully constitutional upon remand. Harder to predict is whether the South Dakota Court’s Complete Auto analysis will be thorough or cursory in nature.
Justice Kennedy’s majority opinion in Wayfair describes Quill as “flawed on its own terms” and “unsound and incorrect” for three primary reasons. First, “the physical presence rule is not a necessary interpretation of the requirement that a state tax must be ‘applied to an activity with substantial nexus with the taxing State’.” Second, “Quill creates rather than resolves market distortions”. Third, “Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow.”
Without the inhibitions of Quill and National Bellas Hess, states are now constitutionally (U.S.) permitted to require an out-of-state seller to collect and remit sales tax - at least under some circumstances. Does this mean “interstate sellers will have to collect sales tax on sales to jurisdictions, regardless of whether or not the sellers have any physical presence (property or personnel) in the state”, as one firm reports? Likely yes (pending remand), but only if limited to South Dakota. Although perhaps also a likely outcome in many other states, this blanket statement is not an accurate description of the nationwide immediate impact of Wayfair. Some of SCOTUS’s obstacles to taxation of remote sellers are now removed, but others remain -- state constitutions, statutes, regulations, jurisprudence not tied to Quill – plus a hard look at Complete Auto may provide additional limitations not previously considered. Wayfairoverreach with some states unduly burdening interstate commerce is also a distinct possibility. We can expect the South Dakota Act to be a template for other states. Certain of these provisions, particularly protection for small businesses, in future cases may be ruled as necessary under the Commerce Clause, that possibility implied in Wayfair.
Although falling short of a small business “safe harbor” requirement, the Court in Wayfair appreciatively notes “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce”. Specifically, the South Dakota Act “affords small merchants a reasonable degree of protection” and includes: 1. A Small Business “Safe Harbor” -- limited to companies with “a considerable amount of business in the State” ($100,000 or more in annual sales or 200 or more separate transactions), 2. “Not Retroactive” provision, and 3. Not Unduly Burdensome Compliance – “South Dakota is a party to the Streamlined Sales and Use Tax Agreement”.
The Wayfair decision answers the viability of Quill’s “physical presence” standard rather definitively but leaves other questions unanswered and raises yet other questions (to be addressed in later submissions). How far states will push the limits of Wayfair is soon to be seen. How long Wayfairis destined to be the law of the land is uncertain. Wayfair’sfuture now rests solely in the hands of Congress.