States challenge 1992 Supreme Court decision by passing new sales tax laws
Posted On: 8-26-2016 | Posted By: Katie Barthel, CPA
In 1992, the United States Supreme Court ruled in Quill Corp. v. North Dakota that states cannot impose sales taxes on retailers unless the retailers have physical presence in the state. But times have changed, and the advent of online retailing recently caused two state legislatures to challenge this decision.
Taxable presence in a state, also known as “nexus,” is a tricky issue that has changed drastically in recent decades at the state and national levels and for both sales and income taxes. Laws that took effect earlier this year in Alabama and South Dakota contradict the 24-year-old Quill decision, indicating that physical presence is not essential to require out-of-state sellers to collect and remit sales taxes.
Alabama’s new legislation, Alabama Rule 810-6-2-.90.03, is effective as of January 1, 2016. This law establishes that any seller, regardless of its physical connection with the state, is required to collect and remit sales taxes if it is determined to have “economic presence” in the state. Economic presence is generated when both of the following criteria are met:
- sales of tangible personal property into the state exceed $250,000 per year; and,
- the seller conducts one or more of the additional activities listed in Alabama Code Section 40-23-68. Examples of these additional activities include:
• the seller is qualified to do business with the state;
• the retailer solicits orders of tangible personal property from Alabama customers by using a broadcaster or publisher located within the state;
• the company has recurring sales to Alabama residents that are solicited by mail; or,
• the seller distributes catalogs to residents of Alabama.
For a complete listing of these activities, see Alabama Code Section 40-23-68.
South Dakota’s new legislation is effective as of May 1, 2016. Senate Bill 106 says that any retailer selling (1) tangible personal property, (2) electronic goods, or (3) services that were delivered, used, or completed in South Dakota, and that does not have physical presence in the state, is required to collect sales tax if either of the following criteria is met:
- sales to South Dakota residents exceed $100,000 during the year; or,
- the seller completed more than 200 separate sales transactions to South Dakota residents during the year.
Alabama and South Dakota are not the only states that have enacted provisions over the last several years which allow them to tax out-of-state sellers for having economic nexus with the state. Sales made over the internet can often generate economic nexus, through what we call “click-through nexus,” which is a form of “affiliate nexus.” For more details about click-through or affiliate nexus, contact your WK advisor.
As time goes on, we expect more states to propose similar regulations, which could ultimately encourage the United States Supreme Court to reconsider its decision in the landmark Quill case. State legislators argue that states which follow Quill favor out-of-state sellers, leaving retailers with physical presence within the state at a distinct disadvantage.
For a more detailed discussion about sales tax nexus and nexus in general, see our article, Does your business owe taxes in other states?
If your company is making sales to Alabama or South Dakota residents, or if you think your entity may have another form of economic nexus with a different state, contact your WK advisor at (573) 442-6171 or (573) 635-6196 to see if one of these new laws applies to you.