Following state court decisions in favor of the retailers, South Dakota appealed to the U.S. South Dakota enforced the act by filing a declaratory judgment action against three major online retailers with no physical presence in the state: Wayfair, Newegg, and Overstock. South Dakota does not impose an income tax and therefore relies on sales and use tax revenue to fund essential state services. It followed the release of a suggested model economic nexus law from the National Conference of State Legislatures, though it did not conform to the model law entirely. The law was enacted by the South Dakota legislature as part of an emergency declaration to prevent erosion of the state’s sales tax base. The Wayfair case examines the constitutionality of a 2016 South Dakota economic nexus law that imposes sales tax collection and remittance requirements on out-of-state sellers delivering more than $100,000 of goods or services into South Dakota or engaging in 200 or more separate transactions for the delivery of goods or services into South Dakota. 8 He characterized the physical presence rule as an “analytical oddity” that “seems deliberately designed” to be overturned. it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” At the time, Justice Gorsuch sat on the 10th Circuit, which ultimately decided that case and upheld Colorado’s remote seller notice and reporting requirements irrespective of physical presence. Brohl 7 suggesting that “There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.” He urged the Court to revisit the physical presence standard, contending that “he Internet has caused far-reaching systematic and structural changes in the economy, and…. They grew bolder still following dicta by Justice Kennedy in Direct Marketing v. Supreme Court denied certiorari in the appeal of the New York high court’s Overstock 6 ruling upholding click-through nexus, the states became emboldened. Over the past decade, assertions of click-through nexus (pioneered by New York) and affiliate nexus have become commonplace. With the rise of the digital economy, states began to lose out on significant sales tax revenues because they were unable to tax online/internet sales under physical presence nexus standards.įollowing Quill, states have engaged in various nexus expansion gambits. Very few consumers comply with use tax requirements. As a complement to the sales tax, states impose use taxes that require the in-state purchaser to pay tax on taxable items on which no sales tax was paid. 5 A seller had to have property, people, or some other physical connection with a state to be required to collect and remit sales tax. In Quill, the Court affirmed and elaborated upon its prior decision in Bellas Hess. North Dakota, the standard for whether a state can require an out-of-state retailer to collect and remit sales tax has been physical presence. Supreme Court’s 1992 decision in Quill v. The Court held that the respondents had established substantial nexus in this case through “extensive virtual presence.” 4 ( Click here to read the ruling in South Dakota v. In overturning its prior precedents the Court determined that physical presence is not required to meet the “substantial nexus” requirement laid out in Complete Auto Transit. The case involves South Dakota’s economic nexus law, which imposes tax collection and remittance duties on out-of-state sellers meeting gross sales and transaction volume thresholds. The Court ruled that the correct standard in determining the constitutionality of a state tax law is whether the tax applies to an activity that has “substantial nexus” with the taxing state. 3 In a strongly worded opinion, the Court held that the physical presence rule in Quill is an “unsound and incorrect” interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of tax revenue. North Dakota 2 and National Bellas Hess v. Wayfair, 1 overturning the physical presence standard espoused in Quill v. Supreme Court issued a decision in South Dakota v. By Sarah Horn (J.D., Editor, Checkpoint Catalyst), Jill McNally (J.D., Editor, Checkpoint), Rebecca Newton-Clarke (J.D., Senior Editor, Checkpoint Catalyst), and Melissa Oaks (J.D., LL.M., Managing Editor, Checkpoint Catalyst)
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