On June 21, 2018, The U.S. Supreme Court issued its highly anticipated decision in the South Dakota v. Wayfair case. The verdict declared that states can impose sales tax nexus without requiring a seller’s physical presence in the state and will have significant implications for all sellers, including automotive suppliers. This decision overturns the Supreme Court precedent in Quill Corp. v. Dakota, which required retailers to have a physical presence in a state before it could compel the seller to collect sales tax from in-state customers. The overturn of the physical presence standard will increase compliance obligations for auto suppliers who, before this ruling, only had to file sales tax returns where they had offices, inventory or employees.
The court’s decision sides with states that, like South Dakota, were ultimately missing out on billions of dollars in income by not collecting and remitting sales tax from online retailers who lacked a physical presence in their state. According to the U.S. Government Accountability Office, state and local governments could have gained up to $13 billion in 2017 if states had been given the authority to require sales tax collection from all remote sellers.
In 1992, North Dakota attempted to require Quill Corporation, a retailer with no physical presence in North Dakota, to collect and pay sales tax for doing business in the state. Having done business through mail orders and by phone, Quill was able to successfully argue that they should not be required to pay taxes in a state in which they had no physical presence. The courts agreed, and thus the physical presence standard was born.
Since then, states have enacted a variety of nexus provisions to counteract the loss of revenue by out-of-state businesses that do not collect sales tax for the state. These types of provisions, which require remote sellers to collect tax or provide information about in-state customers, are known as remote seller nexus. This chart maps out the states that have passed legislation.
In the 1990s, no one could have anticipated how predominant online sales and e-commerce would become. What was once a fraction of interstate sales had become a $450 billion industry. Supreme Court Justice Anthony Kennedy displayed a willingness to revisit the Quill case, recognizing that the decision had become dated. South Dakota identified the window of opportunity to re-challenge the 1992 Quill verdict. In a 5-4 ruling, the Supreme Court overturned Quill’s physical presence standard in Dakota v. Wayfair.
What does this mean for the automotive industry?
If you are an auto supplier that sells or operates in multiple states, this ruling should warrant your attention as it will impact all remote sellers, not just online sellers. Depending on the state, automotive suppliers potentially face sales tax obligations in hundreds of jurisdictions. While it is unlikely that states will enforce sales tax economic nexus statutes immediately, we still urge suppliers to be proactive. More compliance obligations will require more resources.
For instance, auto suppliers will need to think about obtaining and maintaining exemption certificates in more jurisdictions to avoid excessive tax exposure. Auto suppliers will also have to think about when they should start charging and remitting taxes and if they need to obtain or update current sales tax software.
Additionally, dealerships operating at or near the border of their state or selling cars online should also heed this ruling. Each state will have its own set of rules with which they need to comply.
While states aren’t required to collect tax from out of state retailers, many are expected to follow South Dakota’s lead. Some states have passed economic nexus standards that are already in effect or will take effect within the next year. But until Congress issues guidance or legislation, other states are left to navigate their course of action.
The Multistate Tax Commission (MTC) negotiated a special program for online sellers to resolve prior sales tax liability. This program was designed for online sellers with sales and income tax obligations from previous unpaid taxes in 25 different states. The program, which ran from August 17, 2017 to November 1, 2017, has expired.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.