U.S. Supreme Court Decision Clears the Way for West Virginia to Tax Internet Sales
October 11, 2018
On June 21, 2018, in a 5-4 opinion, the United States Supreme Court overturned Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois, which had previously held that a state cannot require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers in the state. See South Dakota v. Wayfair, 138 S. Ct. 2080, 2018 WL 3058015 (June 21, 2018) available at https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf. Given that forty-one states, two territories, and the District of Columbia all asked the Court to reject the “physical presence” test articulated in Quill Corp. v. North Dakota, the Court’s opinion will likely be the catalyst for many states to begin taxing online sales regardless of whether or not a retailer maintains any sort of physical presence within the state.
Since the Quill “physical presence” test was established in 1992, states have been unable to require online retailers to collect sales tax unless that retailer also has some kind of physical presence—an office, warehouse, store, or employees—in the state. In 2016, South Dakota enacted tax legislation that would require online retailers to collect and remit a sales tax “as if the seller had a physical presence in the state.”
In considering the constitutionality of the South Dakota law under its prior Commerce Clause jurisprudence, the Supreme Court noted that state regulations may not (1) discriminate against interstate commerce; and (2) may not impose undue burdens on interstate commerce. The Court previously articulated a four-part test in Complete Auto Transit, Inc. v. Brady, 430 U. S. 274, 279 (1977) in determining whether a tax burdens interstate commerce:
(1) The tax must apply to an activity with a substantial nexus with the taxing State;
(2) The tax must be fairly apportioned;
(3) The tax may not discriminate against interstate commerce; and
(4) The tax must be fairly related to the services the State provides.
Ultimately, the Court’s majority struck down Quill’s physical presence test because it found that the physical presence rule is simply not a necessary interpretation of prior Commerce Clause precedent. Furthermore, the Court held that the physical presence test creates—rather than resolves—market distortions by incentivizing firms to avoid physical presence in multiple states so that it can offer lower prices than competitors with traditional, brick-and-mortar retail stores. Additionally, the Court held that the physical presence test imposes the type of arbitrary, formalistic distinction that modern Commerce Clause jurisprudence disavows. According to the Court, the physical presence test treats economically identical actors disparately based on a single arbitrary factor: physical presence within a state.
With the “physical presence” test gone, states are now free to pass laws similar to South Dakota’s in order to increase tax revenue. West Virginia previously only required collection of the sales tax by out-of-state retailers with some sort of physical presence in the State. See W.Va. Code St. R. §110-15-128 (defining “out of state retailer” as a retailer with an office or other place of business, subsidiary, or agent in West Virginia or a retailer soliciting orders from West Virginia residents by means of advertising in broadcast or print form). A recent Administrative Notice issued by the West Virginia Tax Department appears to be West Virginia’s first formal response to the Wayfair decision. Beginning January 1, 2019, similar to the law at issue in Wayfair, Administrative Notice 2018-18 requires remote retailers that do not have a physical presence in the State to collect state and municipal sales and use taxes if either: (1) the retailer has gross receipts of more than $100,000 from sales within the West Virginia; or (2) the retailer has 200 or more transactions within the State. See https://tax.wv.gov/TaxProfessionals/AdministrativeNotices/Pages/AdministrativeNotices2018.aspx.