Did the SCOTUS Tax Ruling Nullify ‘Physical Presence’ as a Nexus Standard?
This is not a legal commentary on the SCOTUS tax ruling, but it may be one of legal remorse where taxation is concerned.
In one of his last acts as a U.S. Supreme Court Justice, Justice Anthony Kennedy undid the clock 51 years in South Dakota v. Wayfair, (opens as a PDF) and authored a 5-4 decision that may have effectively removed “physical presence” for e-commerce retailers as a nexus standard for collecting and remitting sales and use taxes. This may potentially eliminate one of the most important protections on out-of-state businesses regarding interstate commerce of the past half century.
Why the uncertainty about the SCOTUS tax ruling? Because the court remanded the decision to South Dakota, where the lower court may make further modifications.
What of Taxation Without Representation?
We fought and won a Revolution on taxation without representation, but such tyranny may not seem to count for much where e-commerce is concerned. The National Bellas Hess (1967) and Quill (1992) decisions set and reaffirmed the “physical presence” test that blocked tax collection-and-remittance duties of out-of-state catalog and mail order companies, and their e-commerce offspring. Suddenly, this may no longer provide adequate protection.
The American Catalog Mailers Association identifies many open questions left in this decision’s wake,. Yes, it may have to fall to Congress and a new federal law to sort this all out.
Some tax-hungry states have called this “leveling the playing field.” Hardly. Name me a Main Street retailer who collects and remits taxes for thousands of state and local tax jurisdictions where there is no presence. Yet out-of-state companies, many of them small startups, may have to do just that. And we know how tempting it is to throw tax burdens on outsiders – knowing there are next-to-zero ramifications for doing so. Tyranny.
E-commerce firms today happily collect and remit taxes for jurisdictions where they have a physical presence. They receive a multitude of government services, and they have elected voice through direct representation in those governments. Every e-commerce firm in every state currently collects such taxes from in-state residents. So now we are really going to abandon this wise rationale for distributing tax collection burdens?
Other out-of-state businesses may make a business decision to collect and remit such taxes in states where they are not located. They may anticipate business growth or supply chain relationships that may extend to those other states. Yet, that is a decision as a business – not one mandated by a far-away government or a group of justices bending with the wind.
Interstate Commerce: Ladies and Gentlemen, Watch Your Wallets
As consumers, yes, we are currently responsible for self-reporting our out-of-state purchases, subject to sales taxes, and paying these taxes ourselves where we reside. We are supposed to do this through our state income tax form filing each year. (Interestingly, nearly 90% of business-to-business transactions are compliant, ACMA reported.)
So get ready to open your wallets, because if you haven’t been paying those taxes yourselves now – an e-commerce (and catalog) company may be forced to play state and local tax collector far beyond Hometown, USA. For those businesses in e-commerce, please stay tuned: The focus may turn to the legislative sector and lobbying for relief. In the meantime, it might be prudent to start researching tax collection software, while also devising creative and new non-nexus theories, because taxation without representation doesn’t appear to be one of them anymore.