Sales Tax In The Digital Era: Major Impacts For Retailers In The United States

In its South Dakota v. Wayfair1 decision published on June 21, 2018, the Supreme Court of the United States overturned the position that had been prevailing for half a century, which was based on the Quill Corp v. North Dakota2 and National Bellas Hess v. Department of Revenue of Ill3 cases. These decisions established that a state could not force suppliers to collect sales and use taxes unless they had a substantial nexus in said state. More specifically, a supplier was deemed to have a substantial nexus in a state insofar as it had a physical presence in it.

South Dakota judged that it was losing a substantial amount of its tax base, and thus enacted S. 106, an act requiring that out-of-state suppliers collect and remit sales and use tax if they:

deliver more than $100,000 of goods or services into the state on a fiscal year basis; or engage in 200 or more transactions into the state on a fiscal year basis. Other American states enacted similar laws4. The aim of those acts is to impose an obligation to collect sales or use tax in connection with sales made in a certain state on suppliers who do not have a substantial nexus - in the historical meaning of the word - in the given state.

As expected, several online goods and services suppliers contested the South Dakota act. The South Dakota Supreme Court judged that the act was in direct conflict with the principles established in Quill, hence concluding to its invalidity. South Dakota therefore brought an appeal from the decision in front of the Supreme Court of the United States.

The U.S. Supreme Court reversed the long-established principles requiring the suppliers' physical presence in the state to impose upon them an obligation to register and collect taxes. Basically, the Court concluded that the physical presence criteria is now obsolete due to the importance of online retail sales.

It is in the same vein that the Québec government had proposed modifications to the Act Respecting the Québec Sales Tax ("QSTA") which related to the digital economy and electronic commerce. Those measures were announced in the March 27, 2018 budget and received Royal assent on June 125. These modifications will impose on online suppliers of goods and services who are not resident in Québec and were not regarded as carrying on business in Québec to register for QSTA purposes and to collect and remit the Québec sales tax ("QST") applicable to certain taxable supplies of goods or services made to specified...