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The Dakotas Strike Back: Tax Nexus Showdown at the U.S. Supreme Court

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Today, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair, Inc., et al. The resolution of this case will have sweeping implications for online retailers and taxpayers at large. Under longstanding constitutional jurisprudence, a state cannot require a taxpayer to pay taxes unless it has "substantial nexus" with the state. In 1992, the high court decided Quill v. North Dakota, in which it held that a state could not require an out-of-state retailer to collect sales and use tax - i.e., the retailer does not have substantial nexus - unless the retailer has physical presence in the state.

Since that landmark case, the world has changed. Many states have limited Quill to sales and use taxes and impose income and franchise taxes on taxpayers with "economic presence" in the state - a truly nebulous concept. States have also implemented increasingly sophisticated (and onerous) methods for working around the nexus limitation. But through this all, the U.S. Supreme Court has largely stayed out of the fray - leaving it up to Congress to address the nexus issue through its prerogative to regulate interstate commerce. Congress has not acted; so states have passed laws to force the issue before the court - laws known affectionately as "Kill Quill" statutes.

The South Dakota law at issue requires an online vendor to collect and remit sales and use tax from customers even if the vendor does not have physical presence in the state - a complete affront to the Quill decision. Not surprisingly, the South Dakota Supreme Court felt bound by Quill and struck down the law. But now the U.S. Supreme Court will decide whether Quill remains the law of the land.

If South Dakota prevails, expect to see massive nationwide legislation to require collection of sales and use taxes by online retailers. Also, depending on how the court phrases its opinion, you could expect to see significant nexus legislation relating to income and franchise taxes.

Even if South Dakota is not successful, the Court’s decision to hear the case may stir Congress to act on the issue to restore order where chaos has long prevailed.

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