Can States Tax Telemarketing Transactions? Supreme Court May Overturn Important Sales/Use Tax Case

Telemarketing law compliance is not difficult if a business must consider only one jurisdiction’s laws.  I could show your manager how to comply with the FTC’s Telemarketing Sales Rule (“TSR”) in an afternoon, for example, and recommend record-keeping and periodic auditing such that compliance and “safe harbor” protection would be almost certain in the case of an inquiry or lawsuit.

The complexity, however, comes from the fact that not just one jurisdiction applies laws to a given call, e.g. the Federal Trade Commission’s TSR applies, as do rules from multiple other federal agencies and fifty-plus states and other regulators.

Tax issues create similar complexity—many jurisdictions want a piece of sales, and a nationwide calling business would be faced with a very complex set of equations if it had to withhold sales tax for every jurisdiction into which it called.

Until now, however, the Supreme Court has ruled that states (and other jurisdictions), could only tax sales if the business had a physical presence (aka “nexus”) in that jurisdiction, e.g. employees or physical property.

That may change.

On April 17, 2018, the Supreme Court will consider the case State of South Dakota v. Wayfair, Inc., et al. and potentially overturn its earlier decision in Quill Corp. v. N.D., 504 U.S. 298 (1992), which ruled that states could not collect sales tax from entities unless they had a physical presence in the state. The Court in Quill held the Commerce Clause of the Constitution prohibited taxation unless there was a physical connection between the sale and the taxing state.

Although Wayfair deals with internet sales, the Quill decision has long protected telephone sales from sales tax so long as the caller or its agent had no employees or physical property in the state into which calls were placed.

In 2016, the South Dakota legislature passed a law to collect sales tax from “remote sellers” despite these rulings.  After the governor signed the bill into law, South Dakota’s Department of Revenue sent written notices to sellers asking them to register to pay sales tax.  Wayfair and three other entities did not register, and the state filed suit against them in 2016.  The trial court agreed with the sellers that Quill controlled, and South Dakota could not pass this tax applicable to remote sellers.

On March 5, the United States Department of Justice filed an “amicus” brief.  Courts allow these “friend of the court” to brief issues, even if they are not filed by parties to the case.

The United States urged the Supreme Court to consider the “virtual presence” of Wayfair and other internet sellers as enough “nexus” to provide states “ample authority” to access sales tax against them.

If the Court overturns Quill, and agrees with the United States, states, and potentially counties, cities, school districts etc., will apply many varying rates of tax telephone sales, and compliance will become significantly more complex.

We will carefully track the Supreme Court’s actions in this case.