Impact of Supreme Court's Decision in Wayfair

• Date: 01 October 2018
• Author: Shirley Dennis‐Escoffier
• Published date: 01 October 2018
• DOI: http://doi.org/10.1002/jcaf.22358

IRS

Impact of Supreme Court’s Decision

in Wayfair

Shirley Dennis-Escoffier

The Supreme Court of the

United States has overturned

the physical presence test that

had effectively prevented states

from collecting sales tax on

internet retail purchases unless

the seller had a physical pres-

ence within the state. The Court

had ruled in 1967 and in 1992

that forcing businesses to collect

taxes on sales in states where

they did not physically operate

violated the constitutional

guarantee of due process and

imposed an undue burden on

interstate commerce. Since

those decisions, the rise of

e-commerce has changed the

retail landscape. Cash-strapped

states have attempted to find a

way around the physical pres-

ence barrier to tap into tax reve-

nue from internet sales. Some

states, such as South Dakota,

became more aggressive in

recent years and intentionally

enacted legislation subjecting

internet sales made by out-of-

state businesses to the state’s

tax collection r equirement in

the hope that this would lead

to the Supreme Court reexamin-

ing the issue in light of the

increase in e-commerce. In

2018, the Supreme Court

decided that it was time to

revisit whether states had the

right to collect sales tax from

businesses that ha d only an eco-

nomic connection to their state

when it agreed to review the

constitutionality of the state’s

efforts to enforce its statute in

South Dakota v. Wayfair, Inc.

The Supreme Court’sdeci-

sion gives South Dakota and

other states the ability to pro-

ceed with legislation for collect-

ing sales tax based on economic

nexus rather than physical pres-

ence immediately impacting

out-of-state businesses that have

previously relied on the physical

presence test to protect them

from sale or use tax liability.

States that do not already have

economic nexus laws on the

books are expected to move

quickly to take advantage of

this new decision to enhance

their state tax revenues. Busi-

nesses that have not been col-

lecting sales or use taxes need to

prepare for these new collection

and filing requirements.

SALES AND USE TAXES

State sales tax statutes gen-

erally impose a tax on the sale

of tangible personal property

and occasionally on selected

services. These laws often pro-

vide for a variety of exemptions

and exclusions. When cus-

tomers place orders with an

out-of-state supplier, the tax

on both states often goes

unremitted. This can occur

because the seller is not

required to collect its own

state’s tax when the property is

shipped out-of-state and the

seller is under no obligation to

collect the customers’state tax.

States have argued that con-

sumers should not be relieved of

their liability for payment of the

tax solely because of the loca-

tion of their supplier. Conse-

quently, states enacted use tax

laws to complement their sales

tax statutes. Use tax statutes

impose a tax on the consumer

for the use, within the state, of

property otherwise subject to

sales tax. The use tax applies

only to the extent that the sales

tax has not been paid. Essen-

tially, the statute shifts responsi-

bility to consumers to self-assess

the tax and remit it to their

home state.

Because internet sales are

usually viewed as occurring at

© 2019 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22358 71