Supreme Court Decision Could Subject Businesses to Minnesota Sales Tax

The U.S. Supreme Court’s upcoming decision in South Dakota v. Wayfair could lead to litigation about whether e-commerce retailers from outside Minnesota are subject to Minnesota sales tax.


In 1992, the U.S. Supreme Court held that a state cannot impose sales tax on businesses that do not have a “nexus” (meaning a physical presence such as an office, retail store, etc.) in that state.  Quill v. North Dakota, 504 U.S. 298 (1992).  As a result of Quill, e-commerce companies generally don’t collect or pay state sales tax on transactions unless they have physical operations in that state.

When Quill was decided, e-commerce did not exist, but since then it has grown dramatically—the U.S. Commerce Department estimates that 2017 retail purchases through the web totaled $453 billion. Brick-and-mortar retailers have long argued that because they have to collect sales taxes, which from consumers’ perspective seems like charging more for the same product, they suffer a competitive disadvantage. In addition, if states could collect sales tax on these transactions, they would have a new, quite large, income stream.  For example, the amount of e-commerce sales tax that Minnesota does not collect has been estimated at $132 million to $206 million per year.

South Dakota v. Wayfair, Inc.

In 2016 the South Dakota Legislature passed a law requiring e-commerce companies with at least $100,000 in sales or 200 transactions in South Dakota to collect South Dakota sales taxes even if they have no physical presence there. S.D. Codified Laws § 10-64-1 et seq. South Dakota knew this law was at odds with Quill, but its objective was to use the law as a vehicle to get to the U.S. Supreme Court, because in a 2015 case, Justice Kennedy bluntly invited a re-examination of QuillDirect Marketing Ass’n v. Brohl, 113 S. Ct. 1124, 1135 (2015). Online homegoods seller sued South Dakota, arguing that the law was at odds with Quill. In reliance on Quill, the South Dakota Supreme Court ruled in Wayfair’s favor, and South Dakota appealed to the U.S. Supreme Court. 

The Wayfair oral argument before the Supreme Court was held on April 17, 2017.  South Dakota argued that small businesses are losing sales to e-commerce companies.  Wayfair emphasized the expense and difficulty of complying with the thousands of local and state tax rules across the country. It is difficult to predict the outcome: some commentators concluded that there is a majority of justices who believe Quill was wrongly decided, but also a majority of justices who believe that a solution should be crafted by Congress, not the Court.

Minnesota’s Nexus Law

Although there has been wide media coverage of South Dakota v. Wayfair, it is less well-known that in 2017, the Minnesota Legislature passed a bill that will impose sales tax on certain e-commerce companies if Quill is overturned, or on July 1, 2019, or if Congress enacts a law authorizing e-commerce sales taxes, whichever comes first.  Minn. Laws 2017, 1st Sp. Sess. Ch. 1, Art. 3, §§ 9 et seq., codified at Minn. Stat. § 297A.66 (the “Nexus Law”).

Minnesota’s Nexus Law does not reach all e-commerce retailers, but it extends the reach of Minnesota’s sales tax regime in several ways. First, it defines a category of e-commerce participants called “Marketplace Providers.” A Marketplace Provider is any person who “facilitates a retail sale” by listing or advertising goods or services for sale by the retailer, or by collecting payment from the customer and transmitting that payment to the retailer. If a Marketplace Provider maintains a place of business in Minnesota, sales through that Marketplace Provider would be subject to Minnesota sales tax. The Marketplace Provider concept appears to be intended to capture transactions such as those in Amazon’s “Fulfillment by Amazon” program, in which Amazon stores goods and sends them to the customer on behalf of other companies. There is a safe harbor for retailers whose only sales into Minnesota are through a Marketplace Provider and total less than $10,000 over the previous twelve months.  The Marketplace Provider is also not required to collect sales taxes if the retailer is already registered to pay sales taxes in Minnesota.

In addition, Minnesota’s Nexus Law specifies that if a retailer stores goods in Minnesota, or employs a Minnesota resident who works from a home office, that is a sufficient presence to cause the retailer to be subject to Minnesota sales tax. So if employed a coder who worked from Minnesota, all of its sales to Minnesota residents would be subject to sales tax.

Finally, Minnesota’s Nexus Law imposes sales tax on a retailer if it has “affiliates” in Minnesota, and defines “affiliate” in a very broad and complex way. An affiliate includes a company that uses the same trademarks as the retailer, or a location at which customers can pick up the goods sold by the retailer.

It is easy to imagine litigation that might arise from Minnesota’s Nexus Law. First, the definition of a Marketplace Provider is very broad and open-ended, such that it may be difficult to determine whether a specific company is within its scope. Similarly, the scope of “affiliate” is very broad and could likely lead to disputes. In addition, the Nexus Law invites the Minnesota Department of Revenue to look for national e-commerce retailers who have some minimal presence in Minnesota, such as an employee in a home office or use of a warehouse. Finally, if Quill is not overturned and Congress does not act, it is likely there would be litigation to challenge the Nexus Law when it becomes effective on July 1, 2019. So, for any e-commerce company concerned about Minnesota sales tax, now is the time to consider the issues that Minnesota’s Nexus law may pose. 

For more information, please contact any of the attorneys in our tax practice.

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