Recently, the United States Supreme Court held that an "out-of-state seller's physical presence in the taxing state is not necessary to require the seller to collect and remit its sales tax." A copy of this controversial South Dakota v. Wayfair opinion is available
here
.
Prior to this decision, when an internet retailer lacked physical presence in the State, the State relied on the honor system for its residents to pay the sales and use tax owed on their purchases. Due to low consumer compliance with this system, reports estimated a revenue loss of $48 to $58 million annually in South Dakota alone. This prompted South Dakota to pass legislation requiring "out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in the state." This South Dakota Act applies to sellers that deliver goods or services into the State in amounts exceeding $100,000 or more than 200 separate transactions. South Dakota then filed suit against Wayfair, Overstock.com, and Newegg, to enforce compliance (i.e., to force these companies to register for licenses to collect and remit sales tax even though they had no physical presence in the State).
The main legal issue was whether South Dakota could require these remote sellers to collect and remit the tax without an additional connection to the State. In the most recent Supreme Court opinion clarifying internet sales tax - rendered 26 years ago - the Court held that imposing a sales tax collection and remittance policy on out-of-state sellers would unfairly burden interstate commerce. However, at that time, less than two percent of Americans had internet access and mail-order sales in the United States totaled only $180 billion. Fast-forwarding to 2017, 89 percent of Americans had internet access and e-commerce retail sales exceeded $435 billion.
In his opinion, Justice Kennedy - who recently announced his retirement - explained that the physical presence rule "becomes further removed from economic reality and results in significant revenue losses to the States" as the internet continues to revolutionize retail sales. Additionally, because consumers can access retailers across the country through an internet-enabled device, he opined that "a business may be present in a State in a meaningful way without the presence being physical in the traditional sense."
Absent the physical presence requirement, state taxes will be sustained so long as they:
- Apply to an activity with a substantial nexus in the taxing State,
- Are fairly apportioned,
- Do not discriminate against interstate commerce, and
- Are fairly related to the services the State provides.
Justice Kennedy further clarified that a nexus is established "when the taxpayer avails itself of the substantial privilege of carrying on business in that jurisdiction."
What does this mean going forward?
It is imperative that entities selling goods or services in foreign states stay abreast of legislation enacted in those states. In the wake of Wayfair, it is likely that many states will try to mimic South Dakota's success.
Thus far, the Florida Legislature has not proposed an act similar to South Dakota for the 2019 Session. However, influential groups such as
Florida Tax Watch
have already commended the
Wayfair
decision, stating "all Florida taxpayers can benefit from the ruling, which could bring equity to the state's sales and use tax and provide an economic benefit by providing a boost to the retail sector."
The members of our Government Affairs Group have extensive experience advising clients on Florida Department of Revenue sales & use tax audits and protests. For more information, please contact us.
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