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Wayfair Update: United States Supreme Court Allows Sales Tax Collection on Internet Sales

Tax Alert | June 29, 2018

The United States Supreme Court recently decided in South Dakota v. Wayfair Inc., et al. that South Dakota can impose a sales tax collection obligation on a “remote seller” even if the seller does not have a physical presence in the state. The 5-4 decision overturned the Court’s 1992 decision in Quill Corporation v. North Dakota, 504 U.S. 298 (1992), and it will likely open the floodgates for states and municipalities to require the collection of sales tax on internet sales. 

Our previous article on this issue outlined the background of the case and the various arguments advanced in the litigation. Under the South Dakota sales tax law, remote sellers are required to collect sales tax when the seller is selling tangible personal property, electronically transferring products or providing services for delivery into South Dakota, even if the seller does not have a physical presence in the state, if either of the following criteria exist for the current or previous calendar year: (1) the seller’s gross revenue from the sale of tangible personal property, product transferred electronically or services delivered into South Dakota exceeds $100,000; or (2) such sales, electronic product transfers or services delivered into South Dakota involve two hundred or more separate transactions. The law does not apply retroactively. 

The Court concluded that the Commerce Clause does not require physical presence and held that “the physical presence rule undermines the necessary confidence by giving some online retailers an arbitrary advantage over their competitors who collect state sales tax.” The Court also concluded that its decision in Quill has “limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” 

The key question is: what happens next in terms of sales tax collection for internet sales? While the case specifically analyzed the South Dakota statute, the principles outlined in the case will apply to states and municipalities that impose sales tax. The Court stated that the “law at issue requires a merchant to collect the tax only if it does a considerable amount of business” in a state. The Court emphasized this point because the Commerce Clause requires the sales tax collection obligation to relate to an activity that has “a substantial nexus with the taxing State” based on its prior decisions.

In answer to the question, we know that the economic and virtual contacts of the South Dakota statute ($100,000 in sales or 200 or more separate transactions) set a permissible level for taxation. We expect that states will review their remote seller sales tax provisions and will likely adopt standards to mirror what the Court approved in Wayfair. Nineteen states already have identical or very similar economic nexus standards as South Dakota, and we anticipate that many of the other states that impose a sales tax are likely to follow in the coming months.

A related question is how the decision applies to third-party orders placed through “marketplace facilitators.” Several states, including Pennsylvania, now impose a sales tax collection obligation on marketplace facilitators. Under the Pennsylvania statute, the law applies to a business that advertises goods and services for sale in an electronic form, collects payment from the purchaser on behalf of the seller (either directly or indirectly) and remits payment to the seller. In these transactions, title typically remains with the sellers, although the marketplace facilitator often has possession of the goods in question.

Pennsylvania requires marketplace facilitators with a place of business in Pennsylvania to collect and remit sales tax on its own taxable sales as well as taxable sales placed through the marketplace. If the marketplace facilitator does not maintain a place of business in Pennsylvania and makes or facilitates taxable sales to Pennsylvania customers totaling $10,000 or more in the previous calendar year, the marketplace facilitator has the option to: (1) register to collect and remit the applicable sales tax; or (2) comply with a fairly extensive reporting and notice requirement.  

We anticipate that in addition to changes in sales tax laws for direct sellers, states will now consider the adoption of marketplace facilitator collection and notice laws using the principles in the Wayfair decision.

If you have questions or would like more information, contact John Eagan (; 212.868.4835) or another member of the Tax and Estates Group.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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