On June 21, 2018, the United States Supreme Court overturned Quill Corp v. North Dakota, which prohibited states from collecting sales tax on sales made over the internet. Under this previous holding, online retailers, without a physical presence in the state, were not required to collect sales tax on transactions made with citizens of the state. This holding applied to remote sellers and marketplace providers, as well. The recent holding in South Dakota v. Wayfair Inc. now allows states to collect sales tax revenue from its citizens’ transactions with out-of-state online retailers, remote sellers, and marketplace providers. In the minutes following the Supreme Court’s decision, giant online retailers such as Amazon, Overstock, and Etsy saw their stock value plunge as investor confidence waned. Minnesota stands to collect as much as $150 million to $200 of new sales taxes based on the decision.
The Supreme Court’s Opinion
In a controversial 5-4 decision, the Supreme Court ruled in favor of South Dakota, reversing and overturning the 1992 case of Quill Corp v. North Dakota. South Dakota’s victory over online retailer Wayfair marks a groundbreaking decision in favor of states’ rights. Now, for the first time in history, states may choose to require out-of-state businesses to collect sales tax on transactions made with citizens of the state. Put another way, all states, including Minnesota, are now allowed to impose a sales tax requirement on internet sales to citizens of the state, regardless of whether the retailer has a physical presence within the state.
This controversy began when the state of South Dakota sued Wayfair, seeking to enforce the state’s newly enacted legislation that required the collection of sales tax on transactions made between citizens of the state and retailers with no physical presence in the state. The trial court and South Dakota Supreme Court found in favor of Wayfair, holding that South Dakota’s new legislation violated the Dormant Commerce Clause of the U.S. Constitution. Thereafter, the U.S. Supreme Court agreed to hear the case.
Much of the case’s controversy surrounds the issue of promoting physical, brick-and-mortar stores within the state of South Dakota. In its appeal to the Supreme Court, South Dakota argued that “[s]tates’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.”
In its brief to the Court, respondent Wayfair argued that only collecting taxes from in-state transactions promotes small retail businesses, stating that, “the physical presence rule has permitted start-ups and small businesses to use the Internet as a means to grow their companies and access a national market, without exposing them to the daunting complexity and business-development obstacles of nationwide sales tax collection.”
The Court emphasized its obligation to interpret the Constitution, considering the changes in modern online commerce. The Court ultimately held that the previous analytical test for determining the constitutionality of sales tax collection, provided by Quill Corp. v. North Dakota, does not align itself with modern e-commerce, where massive amounts of sales are made over the internet with out-of-state businesses.
In the wake of the Supreme Court’s ruling, Wayfair issued statements expressing its support of a level playing field between online retailers and brick-and-mortar storefronts on main street USA, while suggesting that the imposition of sales tax on internet transactions was not the right solution.
Implications for Minnesota Business Owners
The real-world implications for business owners have yet to be determined, with the Minnesota Department of Revenue currently reviewing and analyzing the Supreme Court’s ruling. The Minnesota Department of Revenue has issued a statement indicating that the department plans to provide more detailed guidance to business owners within 30 days. Click here: Minnesota Department of Revenue Statement on Internet Sales Tax.
Except for a few large-scale companies with a physical presence in Minnesota, a large majority of out-of-state online retailers have not been collecting sales tax from transactions with Minnesota citizens made over the internet. With the Supreme Court’s holding in South Dakota v. Wayfair Inc., businesses selling to Minnesota citizens and operating without a physical presence in the state may now be subject to sales tax collection requirements yet to be implemented by the Minnesota Legislature.
Some businesses, without a physical presence in the state of Minnesota, may be exempt from collecting sales tax on transactions made with Minnesota citizens. The controversy in South Dakota v. Wayfair Inc. was a question of South Dakota law, which required the collection of sales tax from businesses making more than $100,000 in sales annually. Similarly, here in Minnesota, the legislature may decide to exempt small businesses making less than $100,000 in sales annually from sales tax collection requirements in the future. Minnesota businesses selling to out-of-state individuals will likely not be required to collect sales tax from their customers under Minnesota law, but will be subject to the sales tax collection requirements imposed by the states in which their customers reside.
Although the specific effects of the Supreme Court’s holding are unknown today, it seems likely the Minnesota Legislature will eventually mandate the collection of sales tax on internet sales into the State of Minnesota. The Minnesota Department of Revenue intends to issue guidance to business owners within 30 days.
Contact one of the Minnesota business law attorneys of Trepanier MacGillis Battina P.A. if you have questions regarding the collection of sales tax for internet sales into the State of Minnesota. TMB will continue to monitor state legislation regarding this topic and stands ready to advise Minnesota business clients on their sales tax obligations.
About the Author:
Minnesota business attorney Nathan R. Snyder advises clients in a variety of business law matters, including entity formation, governance, licensing, registration, contracts, sales and purchase agreements, and tax collection. Nate may be reached at 612.455.6218 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota business law firm located in Minneapolis, Minnesota.