U.S. Supreme Court ruling could thwart state attempts to block other states' remote sales tax laws
The Supreme Court of the United States overruled precedent in South Dakota v. Wayfair, Inc. (June 21, 2018), making it easier for states to tax remote sales. Close to 40 states now require certain remote sellers to collect and remit sales tax.
Last week, the Supreme Court again overruled precedent in Franchise Tax Board of California v. Hyatt (May 13, 2019). This decision could make it harder for a state to shield an in-state businesses from an obligation to collect sales tax in another state.
Remote sales tax rulings recap
The U.S. Supreme Court has issued numerous rulings affecting states’ ability to tax remote sales, notably National Bellas Hess v. Department of Revenue (1967) and Quill Corp. v. North Dakota (1992). Both prohibited states from imposing a sales tax collection obligation on businesses with no physical presence in the state. You can learn more about these two rulings here.
The court’s ruling in South Dakota v. Wayfair, Inc. overruled those decisions, finding the physical presence rule to be “unsound and incorrect.” Physical presence in a state still establishes a sales tax collection obligation, but now states can base a sales tax collection requirement solely on a business’s economic activity in a state (economic nexus).
Even though Franchise Tax Board of California v. Hyatt doesn’t directly deal with sales tax, the ruling could impact state efforts to impose a sales tax obligation on businesses in other states.
The Hyatt case grew out of California’s efforts to tax the income of inventor Gilbert Hyatt, who moved from California, which has a personal income tax, to Nevada, which doesn’t. In a nutshell, California auditors claimed that although Hyatt said he had moved out of California in September 1991, he regularly visited the state throughout that fall and conducted business while there (e.g., sending and receiving business-related faxes from the house he had sold to a friend).
Was Hyatt’s move prompted by a desire to avoid income tax? Are there other reasons to move from California to Nevada? (Kidding!)
This is the third time the U.S. Supreme Court has ruled on this issue in 26 years: Hyatt won in 2003, when the court ruled that he could sue the California Franchise Tax Board (CFTB) in Nevada courts. The court upheld that decision in 2016, when there were only eight sitting justices instead of nine. Last week, a five-justice majority found in favor of California when it ruled, “states retain their sovereign immunity from private suits brought in courts of other states.” in other words, someone cannot go into a state and sue another state unless the first state has waived its sovereign immunity.
What Hyatt means for efforts to prevent remote sales tax collection
This case doesn’t directly deal with sales tax, yet it could impact sales tax in Massachusetts and New Hampshire. Yes, New Hampshire, one of five states that has no general sales tax (along with Alaska, Delaware, Montana, and Oregon).
New Hampshire recap: New Hampshire Governor Chris Sununu said after the Wayfair ruling that any state that tried to impose a sales tax collection obligation on New Hampshire businesses would be in for “the fight of your life.”
The governor’s efforts to legally restrict other states from imposing a sales tax collection obligation on New Hampshire businesses have been thwarted thus far. Nevertheless, businesses in the Live Free or Die State have been advised to notify the New Hampshire Department of Justice whenever they receive a request related to the collection of sales tax from an out-of-state taxing authority.
With the Hyatt decision, New Hampshire cannot create a process in the state through which a New Hampshire business could sue another state to avoid collecting that state’s sales or use tax.
Massachusetts recap: The situation with New Hampshire’s southern neighbor is different. Massachusetts Department of Revenue regulation 830 CMR 64H.1.7 imposes a sales tax collection obligation on any out-of-state internet vendor that, in the preceding 12 months, made more than $500,000 in internet sales and at least 100 sales for delivery into Massachusetts.
This regulation predates the Wayfair decision that overruled the physical presence rule. However, it states that internet vendors establish a physical presence in Massachusetts through the software (e.g., web cookies) they place on in-state devices.
Pointing to a Virginia law prohibiting other states from imposing their will on Virginia companies, several internet sellers based in Virginia are suing Massachusetts over the regulation. Massachusetts insists the proper jurisdiction for the legal battle is Massachusetts, not Virginia. The Supreme Court decision in Hyatt gives weight to that claim.
While there are no guarantees, it seems states are relatively secure in their ability to tax certain remote sales now. If you don’t collect sales tax in all states where you sell, you may be putting yourself at risk. Learn more with this state-by-state guide to sales tax nexus rules.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.