Almost all states and territories of the United States, including Puerto Rico, impose a sales and use tax on retail of goods and services within the state. Sellers are required to collect and remit the tax to the corresponding Treasury Department. Since 1992 it was clear, however, that States could not require a business that had no physical presence within the state to collect the sales tax. This was the rule established in the Supreme Court Quill Corp. v. North Dakota decision.
In a major June ruling, South Dakota v. Wayfair, Inc., the U.S. Supreme Court dramatically altered this rule. At issue was a South Dakota law requiring out-of-state sellers to collect and remit sales tax. The law applied to sellers that annually delivered more than $100,000 of goods or services into the state, or engaged in 200 or more separate transactions for the delivery of goods or services into the state. The South Dakota State Courts had found the sales tax unconstitutional.
In South Dakota v. Wayfair, the State argued that in a modern economy a business may not have a physical presence within a state, but could still satisfy constitutional “substantial nexus” requirements mandated by the Interstate Commerce Clause. South Dakota also argued that increases in electronic commerce, concerns with states’ ability to collect adequate revenues, and the overall changes in the national economy favoring online sellers weigh in favor of overturning Quill.
The Supreme Court agreed with the state’s arguments and determined that the physical presence rule established by its earlier decisions was no longer the sole critical factor for taxation of out of state sales. The states and/or territories can now compel out-of-state sellers with no physical presence within the state to collect and remit sales taxes on goods shipped to consumers in the state or territory.
We expect the Commonwealth of Puerto Rico to act fairly quick and adopt provisions that take full advantage of this development and extend its tax power beyond the Island. We will attend to these changes and keep all advised.