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I have only read news stories about the SD v Wayfair decision, and I have 2 related questions.

According to Intuit, there are 12 states that attempt to charge sales tax on all transactions completed by businesses operating in the state, regardless of where the customer is; this is called origin-based sales tax. It is the opposite of destination-based sales tax laws that attempt to collect the tax for the state in which the customer resides.

First, how did Quill v ND apply to origin-based sales tax states? It seems by definition that an entity located in Ohio, for example, had nexus in Ohio and would collect Ohio sales tax on transactions with Ohio residents. But was it also required to collect Ohio sales tax from customers residing in other states?

Second, how will SD v Wayfair apply to origin-based sales tax states for (a) customers residing in that state (say, Ohio) and (b) customers residing in other states?

I hope that all made sense. Thanks!

P.S. What is it about the Dakotas and sales tax cases?

  • The link to an Intuit page in the question seems to be broken. Can anyone supply an updated link? – David Siegel Dec 22 '18 at 3:28
  • I just updated the link to the Intuit page using the Internet Archive (Wayback Machine). – vknowles Dec 24 '18 at 2:21
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I don't think Intuit's description of the situation is quite accurate. As I understand it, the origin vs. destination-based distinction is primarily applicable to in-state sales. So it isn't as much about whether a sales is taxed at all -- the answer is usually going to be the same throughout any state -- as it is about what rate to impose: the high sales tax of the urban center where my store is located, or the low rate in some small village where a customer might be ordering from.

To work through this, keep in mind a few important points of law:

  • Although it's collected by the seller, a sales tax is a tax on the customer. It is no more a tax on the seller than individual income taxes are a tax on the employer who withholds them and remits to the IRS. The seller and the employer may take on administrative burdens, but they are not being taxed.
  • Quill said that State A cannot impose sales tax collection obligations on a remote seller making sales from State B into State A. It did not limit State A's ability to impose collection obligations on retailers who are also inside State A.
  • Quill came out of the same principles that keep a state from imposing taxes on individuals outside their borders. State A generally cannot impose an income tax on a resident of State B working in State B, nor can it impose a sales tax.

So in a destination-based state, under Quill, there were basically three possible sales tax scenarios for a sale, depending on where the customer was. Assume a store in New York City:

  1. For a customer who makes a purchase in the store or has a delivery shipped elsewhere in the city, the store collects state and local sales taxes at the New York City rate.
  2. For a customer who orders a package for delivery to Buffalo, the store collects state and local sales taxes at the Buffalo rate.
  3. For a customer who orders a package from California, the store collects nothing. New York could not reach into California to impose its sales tax on the customer, and California could not reach into New York to force the store to collect California sales tax.

For a store in Ohio, there were only two scenarios. Assuming a store in Cleveland:

  1. For a customer who walks into the store or has a delivery shipped anywhere in Ohio, the store collects state and local sales taxes at the Cleveland rate.
  2. For a customer who orders a package from California, the store collected nothing. Ohio could not reach into California to impose its sales tax on the customer, and California could not reach into Ohio to force the store to collect California sales tax.

So the short answer to your first question is that Quill didn't really apply to origin-based taxes, at least to the extent they were imposed within the state. Sales into other states were not taxed at all.

Under Wayfair, the second part of that changes.

  1. For a customer who walks into the store or has a delivery shipped anywhere in Ohio, the store collects state and local sales taxes at the Cleveland rate.
  2. For a customer who orders a package from California, California may now be able to require the store to collect and remit California sales tax.

I haven't read Wayfair all the way through yet, but I imagine that there would be some limitations on California's taxing authority in this situation. And practically speaking, most states already limit their collection obligations for remote sellers pretty seriously. So if the Cleveland store was tiny or never sold anything else into California, it probably wouldn't need to collect anything.

  • "Although it's collected by the seller, a sales tax is a tax on the customer." This would be common, but there is no reason a state has to write its tax laws this way and Intuit suggests that a dozen states have chosen to do something different. I don't think that there is any reliable way to know how a situation with an origin based tax and a recipient based tax is resolved post- Wayfair. It is an open question of first impression. In the absence of either tax being found unconstitutional under the dormant commerce clause, the seller could be subject to both sets of taxes. – ohwilleke Jun 25 '18 at 20:42
  • I don't think that's right. Intuit isn't saying that origin-sourced states impose the tax on the seller; it's saying that the tax is imposed using the rules from the seller's jurisdiction. It is still paid by the buyer and only collected by the seller. We know how a destination-based system would shake out under Wayfair because South Dakota was using a destination-based system: demanding collection of South Dakota sales taxes on Wayfair's sales with destined for South Dakota -- the only wrinkle was that they were applying their tax extraterritorially. – bdb484 Jun 25 '18 at 21:06
  • You're of course right that the states could devise a different system. Several impose gross receipts taxes instead of or in addition to the sales tax, and several have toyed with the idea of the VAT. Either of those could replace the sales tax as a revenue stream while imposing both the collection and the payment burden on the seller. – bdb484 Jun 25 '18 at 21:07
  • It certainly seems that the "Transaction Privilege Tax" collected by Arizona, for example, in lieu of a sales tax, is imposed on the seller and not just imposed on the buyer and collected by the seller. azdor.gov/transaction-privilege-tax-tpt – ohwilleke Jun 26 '18 at 0:00
  • I appreciate your breaking it down that way. It sounds like we'll have to wait and see how Wayfair is implemented (and probably litigated). As an analogy, does Wayfair now treat any out-of-state seller as if they were a door-to-door salesperson selling in the customer's state for the purpose of collecting sales tax? My original question, though, is whether an origin-based law like Ohio's would conflict with a destination-based law like California's, so that both states would claim that the seller should collect their sales tax? – vknowles Jul 23 '18 at 19:18

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