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Supreme Court cliffhanger: What Wayfair means to businesses?

The end of tax-free online shopping may be in sight. That’s the outcome we could see if the Supreme Court abandons the physical presence test established in the 1992 Quill Corp. v. North Dakota South. In Quill, the Supremes said it was up to Congress to change the physical presence test. Alternatively, the Supremes could uphold the physical presence test when they deliver their decision this summer on South Dakota v. Wayfair, Inc. (see Supremes deliberate while sales tax jurisdictions climb over 10,000).

With vastly different outcomes riding on this decision, what can businesses expect?

  • If the Supremes abandon the physical presence test, all businesses could be required to collect sales/use tax. The cost of collecting may fall disproportionately harder on small businesses than large. So while most large businesses and states believe all businesses should collect sales/use tax, the complicated cost of administering sales/use tax collections at the point of sale could put some small businesses out of business.
  • If the Supremes uphold the physical presence test, states will continue to work around the restriction, implementing various schemes to make sure they get paid for in-state transactions, including use tax notification policies. See the table below for a listing of states with use tax reporting statues as of Feb. 1, 2018.

At issue in Wayfair is whether the physical presence test alone should determine whether retailers collect sales/use tax. Quill handed over the decision to Congress to change the physical presence test. Congress has since had more than 25 years to decide how these interstate transactions should be treated and has failed to do so.

If the Supremes reverse Quill, states could be authorized to mandate sales tax collection by remote sellers. If the Supremes uphold Quill, Congress once again would have a crack at settling the issue.

At the close of oral arguments, the justices appeared split and the projected outcome is a cliffhanger. A decision is expected mid-summer. We’ll keep you posted.

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Judy Vorndran, lead state and local tax partner, can be reached at jvorndran@taxops.com or 720.227.0093. Follow Judy on LinkedIn.

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