International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Supreme Court decision in Wayfair sales tax case imminent


The US Supreme Court’s decision in the seismic South Dakota v Wayfair case, which concerns state sales tax, should be released before the end of June. It could leave companies around the world facing retroactive exposure in the billions of dollars.

US states cannot levy sales tax on out-of-state remote sellers because of the 1992 decision in Quill, taken before the internet transformed commerce. South Dakota has argued that this creates an “unlevel playing field” and gives out-of-state remote sellers a price advantage.

However, given the gravity of overturning Quill, which says state taxes may only be applied to businesses with an in-state physical presence, the Supreme Court may take the unusual step of recommending Congress deal with the issue.

David Fruchtman, chair of Rimôn’s state and local ( subnational ) taxation practice, told International Tax Review that if the court rules in favour of the state, it could have a damaging impact on small businesses. In addition, the ruling could apply to e-commerce companies across the US and foreign businesses selling into the country.

Facts of the case

The “tax case of the millennium” – so dubbed by the National Conference of State Legislatures – arose through South Dakota arguing that Quill is costing it tens of millions of dollars in potential revenues each year.

The Supreme Court first decided in the 1960s that only businesses with a physical presence had to add sales tax to purchases. This was solidified by its decision in Quill vs North Dakota , when it ruled that mail orders placed through out-of-state companies could not be subjected to sales tax.

Quill sold to consumers in North Dakota through the post using methods like catalogues and phone orders. As it had no staff or physical presence in the state, the Supreme Court ruled businesses did not have to pay local taxes.

Of course, catalogue shopping is not the lucrative industry it once, having been eclipsed by internet sales. E-commerce represented 13% of total retail sales in 2017, and 49% of the growth, according to the U.S. Commerce Department.

In a bid to capture revenue from out-of-state e-commerce sales, South Dakota passed a law in 2016 requiring online retailers to charge sales tax to online shoppers from within its borders. As soon as the law was passed, it sued four retailers – among them, Wayfair – for not complying.

Wayfair successfully argued in a lower court that the tax violated Quill, meaning that the case rose quickly to the Supreme Court. This approach, known as ‘fast-tracking’, ensured that the case moved at “lightning speed”, said one adviser.

However, this has left the case with no record – that is to say, little in the way of assessment on what the impact of overruling Quill would be.

Will South Dakota succeed?

“If you’d asked me before the hearing on April 17 I’d have said, unequivocally, that I thought Quill was going to be overturned,” Steve Wlodychak, EY’s state and local tax policy leader, told ITR. “Why else would they [the Supreme Court] take the case?”

However, following oral arguments that were presented on April 17, a decision in favour of South Dakota – which would have a seismic impact – looks far less likely.

“As I read the transcript [of the April 17 hearing] it was amazing to me that the liberal justices, who one would have thought would be siding with the state, raised serious, serious concerns that the state had not properly answered, ” Wlodychak  elaborated .

Part of this relates to the legal concept of stare decisis, which essentially means that if a matter has already been ruled on there is no need to decide upon it again.

During the April 17 hearing, Justice Breyer said: “Part of the problem… is the fact that there’s no record in this case. And so, in trying to determine even as a matter of stare decisis where there is a special justification for overruling Quill, I think the problem that you've identified is that no record has been presented to the court that would support that substantial justification.”

Retroactivity and small businesses

What looked like a fairly cut and dry case has not been handled well by the state of South Dakota.

The speed of the case could count against the state if the court is wary of putting out a decision with retroactive, international implications.

“South Dakota made a mistake by setting its transaction threshold so low (200 sales delivered into the state in a year),” Fruchtman told ITR. “The court will treat that sales volume as the threshold it is being asked to approve nationally, but the compliance costs imposed on businesses from such a low threshold far-exceed the taxes that states might collect on such a small number of sales.”

“Similarly, while South Dakota’s law is designed to apply prospectively only, other states have indicated a desire to apply the decision retroactively,” he added. “How far back? Within vague limits, that is largely discretionary with each state.”

The US Solicitor General, arguing in support of South Dakota, said that the physical presence required under the Supreme Court’s longstanding interpretation of the Commerce Clause only applies to catalogue sellers – not online sellers.

“For small businesses [this] translates into a potentially business-crushing exposure for uncollected taxes, as I heard from several clients just last week,” said Fruchtman.

International implications

The implications don’t stop in the US. Businesses with no US permanent establishment (PE) that sell into the country benefit from the precedent set by Quill , and Wayfair has the potential to change that.

“There is no question that tax presence can exist for all types of subnational taxes even in circumstances in which there is no PE,” said Fruchtman. “However, the physical presence requirement has provided a safe harbour for sales taxes for treaty-protected businesses.”

A decision allowing South Dakota’s sales tax could bring international businesses into the costly world of multi-state compliance.

“Worse still, these issues could be retroactive as well as prospective,” warned Fruchtman. “And, to be clear, these multistate sales tax requirements may exist even in the absence of a US federal income tax filing obligation.”

Some major companies, including Amazon and Walmart, already collect online sales tax on behalf of the 45 states which have one. But many other sellers – including Amazon Marketplace – use Quill as justification to not do so.

Awaiting a Wayfair decision

“We’re waiting with baited breath for this ruling,” said Wlodychak. “The court has announced it’s going to issue some opinions [on June 14]. That could include the Wayfair ruling.”

However there’s no guarantee that June 14’s tranche of opinions will include Wayfair, said Wlodychak. “The court works in mysterious ways,” he said, likening its process of selecting cases to the way the Catholic church selects a new Pope, with white smoke or black smoke coming from a chimney.

The Wayfair decision was not released on June 14, but it is likely to come out before the end of the month.

more across site & bottom lb ros

More from across our site

Fresh details of the European Commission’s state aid case against Amazon emerge, while a pension fund is suing Amgen over its tax dispute with the Internal Revenue Service.
The OECD’s rules may be impossible for businesses to manage, according to tax experts from companies including Shell.
The UK government is now committed to replacing the ‘super-deduction’ with a 100% capital allowances regime to offset the impact of the corporate tax rise to 25%.
Corporate tax is set to rise in the UK for the first time in decades, but the headline rate remains historically low despite what many observers think.
President Joe Biden’s nominee is set to be confirmed as IRS commissioner for a five-year term.
British companies are waiting to hear the details of what will replace the 130% ‘super-deduction’ next week, while Spain considers stopping a major infrastructure company moving to the Netherlands.
President Joe Biden wants to raise corporate tax and impose a higher stock buyback tax on US businesses, but his budget proposal faces insurmountable obstacles in Congress, writes Ralph Cunningham.
EY is still negotiating the terms of the plan to split its audit and consulting functions, but the future of tax services is reportedly a sticking point.
Country-by-country reporting is the best option for safe harbour provisions under the global anti-base erosion rules, according to tax directors at companies including Standard Chartered Bank and Pernod Ricard.
Arthur Laffer's famous bell curve still looms large in tax policy even though the evidence for it doesn’t stack up.