Fuller Insights

On June 21, the US Supreme Court issued its much-anticipated opinion in South Dakota v. Wayfair, overturning its 1992 decision, Quill v. North Dakota, which required an out-of-state vendor to have an in-state physical presence in order for a state to impose sales tax compliance burdens. Wayfair is a very significant decision that will affect many Canadian companies who sell to customers in the United States, although many questions remain.

The Original Quill Decision

Quill had interpreted the Commerce Clause of the US Constitution as limiting the states’ ability to require sales and use tax compliance by out-of-state vendors to only those vendors that had some (e.g., any) in-state physical presence such as that created by people (i.e., employees, agents, or representatives) or property (e.g., an office warehouse or inventory). Under Quill, an in-state physical presence equated to “an activity with a substantial nexus with the taxing state” allowing the state to impose its sales tax compliance jurisdiction on an out-of-state vendor. In other words, an out-of-state vendor with no in-state physical presence was not obligated to collect and remit sales tax on sales to customers located in the taxing state as it was considered to be an “undue burden” on interstate commerce under the Commerce Clause.

For example, the Maine Lobster Pot Company (“the Company”) makes lobster pots at its facility in Portland, Maine which it stores and ships from a warehouse in Portsmouth, New Hampshire. Word got out that their lobster pots were the best around and sales exploded without anyone from the Company leaving Maine or New Hampshire. The Company sold lobster pots online via its website to customers along the eastern seaboard. It collected sales tax in Maine where it was headquartered but not in two proximate states, New Hampshire or Massachusetts. Since New Hampshire does not impose sales tax, the Company had no obligation to collect sales tax even though it’s warehouse gave it an in-state physical presence. Massachusetts does impose its 6.25% sales tax on lobster pots but could not require the Company to collect sales tax since it had no physical presence in Massachusetts. Seemingly, Wayfair paves the way for states like Massachusetts to impose sales tax compliance obligations on the Company.

The Recent Wayfair Decision

In the Wayfair decision, the Supreme Court acknowledged that the physical presence standard it set forth in the Quill decision was no longer a workable standard for “substantial nexus” given the evolution of the electronic marketplace. How far the decision will affect out-of-state vendors remains to be seen. If a state’s sales tax statutes specifically set forth a physical presence standard, does the state now have to rewrite its law? Can a state whose statutory language indicates it applies to out-of-state taxpayers to the extent allowable under US federal law start imposing sales tax compliance on out-of-state vendors right away? Can a state apply Wayfair retroactively (the South Dakota statute at issue was not retroactive)? Must a state have de minimus exceptions to exclude certain small businesses as did the South Dakota law at issue? Is there no longer any limitation to what constitutes “substantial nexus” under the Commerce Clause? Does Wayfair only apply to the twenty-something states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA) like South Dakota? As you can see, many questions remain to be answered.

Wayfair is limited to sales and use tax and does not apply to any other state tax. Canadian companies are reminded that the US-Canada tax treaty does not apply to sales tax. A company that previously had some physical presence in one or more states but did not comply with sales tax laws should contemplate their next step, as should companies that face the inevitable new compliance challenges as a result of the Wayfair decision.

With a large and highly-qualified US tax practice, Fuller Landau is well equipped to assist. For more information, please contact US Tax Partner, Jeffrey Brown, at 416.645.6515 or at jbrown@fullerllp.com.