State sales tax in a post-Wayfair world

Earlier this summer, the Supreme Court decision in South Dakota v. Wayfair redefined a state’s ability to collect sales tax from online retailers selling goods or services within the state. The case addresses a South Dakota law which requires out-of-state companies that sell goods or services to South Dakota purchasers which exceed minimum thresholds to collect state sales tax at the time of purchase. Under established Supreme Court precedent, a seller had to have property, people or another physical connection within a state to be required to collect and remit sales tax.

Wayfair overturned the 1992 Supreme Court Case, Quill v. North Dakota, where the Court previously ruled that only those companies with a physical presence inside a state can be required to collect sales tax. The Court found that the physical presence rule in Quill is an “incorrect” and “outdated” interpretation of the Commerce Clause.

In the era of e-commerce, states have lost significant sales tax revenues because they have been unable to tax internet sales under the physical presence nexus standards. In overturning its prior precedents, the Supreme Court determined that the correct standard for determining the constitutionality of a state tax law is whether the tax applies to an activity that has “substantial economic nexus” with the taxing state.

Under Wayfair, states can now require online retailers, such as Amazon and Wayfair, to collect sales tax on purchases made by the state’s residents, even if the retailer lacks a physical presence in the taxing state. This has prompted several states, including Illinois, to adopt similar laws. Effective Oct. 1, 2018, retailers that deliver either (a) more than $100,000 of goods or services to Illinois purchasers or (b) engage in 200 or more separate transactions within the state of Illinois  will be required to collect and remit Illinois sales tax, regardless of whether such retailer has a physical presence in Illinois.

In light of the Wayfair holding, online retailers and small businesses alike need to be cognizant of the tax laws in the states in which they are selling goods and services. In particular, companies selling goods or services in Illinois should review their current sales records to confirm whether they will be required to collect and remit Illinois sales tax in order to implement appropriate procedures prior to Oct. 1, 2018. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Kathryn L. Kaler, Associate