Tax laws

The Wayfair Decision: How Technology Is Changing State Tax Laws | Bowditch and Dewey

The decision of the Supreme Court of the United States in South Dakota vs. Wayfair, Inc. 138 S.Ct. 2080 (2018) has changed the way businesses think about state tax compliance. In Wayfair, the Court upheld a South Dakota sales tax law that required out-of-state online sellers to sell goods or services worth more than $100,000 to customers in the South Dakota. In so ruling, the Court reversed existing Supreme Court precedent which had declared unconstitutional (under the Commerce Clause and the Due Process Clause) for states to require a business to collect and remit a tax of sale to the state, unless the business has a physical presence in the state. [See National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).] In Wayfair, the Supreme Court recognized that with the development of the internet, an online seller “may have a significant presence in a State without that presence being physical in the traditional sense of the term”. Since the Supreme Court ruling, 45 states in addition to South Dakota have extended the scope of their sales tax to out-of-state sellers.

We have yet to see if states will change their income tax laws to tax the income (in addition to sales) of out-of-state businesses that sell to customers in a particular state. Congress passed Public Law 86-272 in 1959 to prohibit states from imposing a net income tax on business income derived from a state, if the only business activities within the state conducted by or on behalf of the business is to solicit orders for the sale of tangible goods. personal property (and sales business and shipping business are out of state). However, this law only applies to the sale of tangible personal property. Licensing, franchising and other service agreements are not protected by Public Law 86-272.

With the advent of software as a service sold online via the Internet, states may change their income tax laws to tax income generated from this economic activity. the Wayfair decision paves the way for such a change in tax law. Speak with your tax advisor to help you establish a plan to effectively manage state tax compliance. And stay tuned, as state laws change to accommodate the rise of technology on industry as the primary source of revenue for our economy.