On June 21, 2018, the United States Supreme Court issued its decision in South Dakota v. Wayfair. The decision overruled decades of prior precedent holding that remote sellers of products – including tobacco products – ordinarily are not required to collect sales or excise taxes if they lack a physical presence in the purchaser’s state. In Wayfair, the Court upheld a South Dakota statute that required sellers in other states to collect taxes for sales to South Dakota consumers if the seller annually delivers more than $100,000 worth of goods in South Dakota or makes more than 200 sales to South Dakota consumers.
Before the Court’s decision in Wayfair, remote sellers generally were not required to collect sales or excise taxes if they did not have a physical presence in the consumer’s state. This rule was rooted in Supreme Court precedent dating back to 1967. With the increasing popularity of remote sales over the Internet, South Dakota sought to challenge this long-standing precedent by passing a law requiring sellers with sufficiently pervasive sales to collect and remit taxes to the state, even if the seller did not have a physical presence in the state. The Supreme Court ultimately upheld the law, finding that the prior “physical presence” rule was both unsound and incorrect.
What does this mean for remote sellers of consumer goods, including tobacco products? The Court’s decision means that remote sellers could be required to collect and remit taxes for sales, even if they do not have a physical presence in the consumer’s state. Although the decision in Wayfair dealt only with sales taxes, it seems that the Court’s rationale could similarly be applied to excise taxes. Although the Court provided little guidance regarding the constitutional limits of the states’ taxing authority, it seems clear that South Dakota’s scheme is likely constitutional. Expect to see other states pass laws similar to South Dakota’s in an effort to tax remote sales to constitutional limits.
If you sell tobacco products on the Internet or through catalog sales, the Court’s decision in Wayfair likely will entail substantial new tax requirements. If you have questions about Wayfair’s impact on your business, please let us know how we can help.