The Supreme Court is set to rule on South Dakota v. Wayfair within the next couple of weeks. Regardless of the the Supreme Court's decision, it's likely to have a major impact on how states approach sales tax collection for out-of-state retailers. What might this change look like?
Why The Challenge?
South Dakota's lawsuit was designed to force the Supreme Court to rule on the physical presence standard established under Quill Corp. v. North Dakota. Given that commerce has changed drastically since 1992 with the explosion of online sales, South Dakota is betting the Court with either strike down Quill or at least establish a new test, more appropriate for the internet age.
South Dakota, like many states, believes they are losing significant sales tax revenue due to increasing online retailers and losses in the classic brick and mortar business model. While out-of-state sellers without a physical presence aren't currently required to collect sales tax, the transactions aren't exempt from tax, the purchaser is required to pay use tax directly to the state. The states, who have historically relied upon businesses to collect sales tax on their behalf, have struggled to do the same at the individual level.
What Are SCOTUS's Options?
The Tax Foundation has laid out what they believe are the five potential outcomes; reaffirm Quill, reverse Quill, uphold South Dakota's law without providing guidance, uphold South Dakota's law and provide guidance, or send it back to a lower court.
Should SCOTUS reaffirm the physical presence requirement as was done in the Quill decision and leave sweeping decisions to Congress as they did in the 1992 Quill ruling. South Dakota (and the states collectively) will have lost this battle to drastically change tax law. But even with the loss it's likely many states will follow the lead of Colorado and implement "Notify and Report" legislation or expand nexus language such as Alabama (economic nexus) or even push the envelope with "cookie nexus" legislation. All this while Congress decides whether to act (it's only been 26 years).
This is the option that would have the greatest immediate disruption. By reversing Quill, SCOTUS would be effectively leveling the playing field between large corporations and small businesses, while the burden of compliance disproportionately impacts small businesses. Each state already has differing laws related to sales tax, by striking down Quill and opening up tax collection on interstate sales, the Court would be requiring small businesses to comply with roughly 10,000 tax jurisdictions (this number is widely debated and varies greatly by tax software provider, I believe it's a conservative figure). This reversal would also likely provide an opportunity for the states to greatly expand their tax base by modifying nexus language.
Uphold SD Law Without Guidance:
If the Court decides to uphold the South Dakota law, it would set a new precedent for tax collection on interstate commerce. In not providing guidance, the Court would be "staying in it's lane" but would be leaving many questions unanswered and to be determined by legislative challenges by many states over many years. This would be a complete shakeup that would have the states testing the limits of the decision for years to come.
Uphold SD Law And Provide Guidance:
If SCOTUS were to rule in South Dakota's favor and provide explicit guidance regarding what is permitted, it would perhaps be the cleanest solution to this problem establishing clear lines for the states to follow as they modify their laws. The Court decided in 1992 that Congress is better suited to solve this problem, but since they have not acted it's possible the Court takes sweeping measures. Providing a framework for states to work around would prevent a legal bottleneck for years to come, but is it really the Supreme Courts responsibility to solve Congress's inaction.
The Court could send this back to a lower court to better assess the technical details. While it might eventually end up back in SCOTUS, it would largely be status quo requiring Congress to act. In this situation states will continue to be creative in modifying collection laws and expanding the tax base.
How Will Industry be Impacted?
It depends on the outcome, if the court reaffirms Quill or sends the case back to a lower court, it's not likely much will change in the short term. Businesses will need to keep an eye out for state level changes impacting where they do business, states will continue to look for creative avenues to boost revenue.
If the court reverses Quill or upholds South Dakota's law (with or without providing guidance), it would be a seismic shift related to tax collection on interstate commerce. While this would be a giant boon for the taxing jurisdictions, it almost exclusively impacts SME businesses, companies more likely without the resources, such as a Tax Department, to handle the increased burden of sales tax compliance. Large enterprises, for the most part, have been voluntarily complying with state laws where they might not have nexus, as a service to their customers (if they collect sales tax, their customers aren't burdened with use tax).
But What Really Changes?
The day's of sales tax free online purchases at the consumer level are dying, will it continue to be death by a thousand cuts or a leap off a cliff. Sales tax reform has been a slow drip for a number of years and will continue on this path unless SCOTUS and Congress take action on an issue they've been reluctant to address. The ruling can only speed up and simplify future legal battles not change the fact that states will continue to aggressively pursue lost revenue.