The World Health Organization has officially declared the coronavirus outbreak to be a pandemic. In addition to the cost on human life, the rapid spread of COVID-19 has left a trail of economic damage affecting business revenues. COVID-19 has caused complete or partial shutdown of factories, supply chain disruptions, and labor shortages, and has impacted demand in certain industries. This impact will also be felt by U.S. state, and local governments.
The physical presence standard is no more. In a 5-4 decision issued this morning, the U.S. Supreme Court reversed its own precedent that, for over fifty years, provided an in-state physical presence by a retailer was a prerequisite for the constitutional imposition of a state sales or use tax collection obligation. See South Dakota v. Wayfair, Inc., No. 17-494 (U.S. Jun. 21, 2018), rev’g Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess Inc. v. Illinois, 386 U.S. 753 (1967).
Baker McKenzie attended the U.S. Supreme Court’s oral arguments yesterday in South Dakota v. Wayfair, Docket No. 17-494. At issue in the case is whether the Court should abrogate the physical presence nexus standard that it first articulated in National Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967), and later affirmed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court’s decision could have a profound impact on sales and use tax nexus in the United States by altering the limitations currently imposed on a state’s ability to require out-of-state retailers to collect such tax.
Just over a month ago, the U.S. Supreme Court surprised many in the state tax community when it announced that it granted certiorari in South Dakota v. Wayfair, Inc., Docket No. 17-494; appealed from 901 N.W.2d 754 (S.D. 2017). Granting cert. in Wayfair means that the U.S. Supreme Court may be willing to overturn precedent that, for over fifty years, has provided and continues to provide a bright-line physical presence nexus standard applicable to states’ ability to impose sales and use taxes. See National Bellas Hess Inc. v. Illinois, 386 U.S. 753 (1967), affirmed in part by Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The U.S. retail economy and its transition from brick-and-mortar storefronts to e-commerce retailers have thus been shaped by the expectation that physical presence within a taxing state is required before that state may impose sales or use taxes on a retailer.