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Change is Coming!

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The Supreme Court ruled in favor of a South Dakota tax law that aggressively requires remote sellers to collect and remit sales tax if they engage in 200 or more transactions with, or have over $100,000 of sales to, South Dakota customers. This applies even if the remote seller has no physical presence in the state. This ruling over turns the “physical presence” standard which was adopted 26 years ago by the Supreme Court in its Quill v. South Dakota ruling.

Justice Kennedy of the Supreme Court stated that with every passing year the “physical presence rule becomes further removed from economic reality.” Kennedy was joined by Justices Alito, Gorsuch, Ginsburg and Thomas in finding that Quill “imposes the sort of arbitrary, formalistic, distinction that the Court’s modern Commerce Clause precedents disavow.”

In addition, Justice Kennedy stated that the decades old ruling in Quill created a competitive disadvantage for local and interstate businesses. Moreover, the opinion rejects the idea that a single employee should be able to create physical nexus as mandated in Quill, but that “physical aspects of a pervasive modern technology should not.”

How does this ruling affect your business?

It is anticipated that the vast majority, if not all of the other states, that administer sales tax will duplicate the South Dakota’s law now that the Court has upheld its aggressive tax position constitutionality and set a precedent.  Therefore, e-commerce companies and sellers using Amazon.com and similar platforms will have to observe South Dakota’s law, if they meet the sales thresholds outlined in the various state legislation.

Unfortunately, the sales tax compliance burden on small e-commerce businesses will greatly intensify.  Businesses now will become targets of state sales tax audits even though there are no employees, property or owners of the company located in the remote state where the sales are derived.  The Supreme Court’s decision in South Dakota v. Wayfair provides intense exposure companies will have regarding out of State sales to end users. 

However, there are solutions.

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