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Post Date:  6/26/2018
Last Updated:  6/26/2018

Summary
Cross References
- Wayfair, Inc., U.S. Supreme Court, June 21, 2018

States often impose a sales tax on the purchase of consumer goods. The tax is generally collected by the seller of the consumer goods when a customer makes a purchase. The seller then remits the tax that is collected to the state taxing authority. If for some reason the sales tax is not collected and remitted to the state by the seller, then in-state consumers are separately responsible for paying a use tax at the same rate. Many states employ this kind of complementary sales and use tax regime.

In two earlier cases, the U.S. Supreme Court held that an out-of-state seller's liability to collect and remit the tax to the consumer's state depended on whether the seller had a physical presence in that state, but that mere shipment of goods into the consumer's state, following an order from a catalog, did not satisfy the physical presence requirement. In such a case, the consumer would then be responsible for paying the use tax on the out-of-state purchase. Consumer compliance rates are notoriously low. Some reports have estimated a 4% collection rate for the use tax. States lose $8 to $33 billion annually from uncollected use tax.

The state of South Dakota does not have an income tax. It collects 60% of its general fund from sales and use taxes. It estimates lost revenue of $48 to $58 million annually from uncollected use tax. In 2016, South Dakota enacted a law requiring certain out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in the state. The law applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state.

The taxpayers in this case are merchants with no employees or real estate in South Dakota. Each merchant meets the minimum sales or transaction requirements of the South Dakota law, but none of them collects South Dakota sales tax. South Dakota then asked the Supreme Court to reconsider the scope and validity of the physical presence rule that was mandated by previous Supreme Court cases.

The Commerce Clause in the U.S. Constitution grants Congress the power to regulate Commerce between the states. In general, Congress has left it to the courts to formulate the rules that preserve the free flow of interstate commerce. There is a long history of court rulings that have determined the extent to which a state may regulate commerce. The court has previously ruled that the imposition on the seller to collect tax from the purchaser does not violate the Commerce Clause. The only limitation is that there must be a substantial nexus with the taxing state. This nexus requirement means that there must be some definite link, some minimum connection, between a state and the person, property, or transaction the state seeks to tax.

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