The increasing prevalence of virtual businesses in the modern economy presents new challenges for local governments. Virtual businesses like DoorDash, Instacart, AirBnB, and Rover provide goods or services through an app-based platform and often have no physical presence within the local government’s jurisdiction. A critical question that these companies create for local governments is whether a taxing jurisdiction may require virtual businesses to apply and pay for a business license.
Until recently, there were limited sources of guidance available in South Carolina to answer this question. On July 26, 2023, the South Carolina Attorney General’s office released an opinion discussing whether a peer-to-peer car rental platform, Turo, Inc., was subject to the Myrtle Beach business license tax.
The opinion was not decisive, but instead stated that in the absence of physical presence in the city, “a court may find Turo is not doing business within City [emphasis added].”
DoorDash, Inc. vs. City of Anderson case
The South Carolina Administrative Law Court recently issued a helpful opinion on the question of licensing virtual businesses, although the likelihood of further court appeals means that the issues involved are not yet fully resolved.
The dispute before the court centered on DoorDash’s challenge to the City of Anderson’s business license tax assessments for 2022 and 2023. DoorDash argued that South Carolina law requires physical presence before the local government may require a business license, and that imposing a business license tax on a virtual business violates the U.S. Constitution. The Municipal Association of SC supported the City of Anderson’s legal work in the lawsuit.
In considering the state law issue, the court explained that Anderson’s ordinance defined "business" as activities conducted “directly or indirectly” for gain within the city. It concluded that DoorDash’s operations, which include partnerships with 94 local restaurants, clearly met this definition. The court further emphasized that physical presence is not required for the imposition of the tax.
The federal constitutional issue was more complex. The U.S. Supreme Court had long held that, under the due process and dormant commerce clauses of the U.S. Constitution, a business must have a sufficient connection or “nexus” with the local jurisdiction before it may be subject to taxation.
Until the 1970s, the Supreme Court considered that this required nexus included physical presence. But in two cases, Complete Auto Transit v. Brady in 1977 and South Dakota v. Wayfair, Inc. in 2018, the Supreme Court held that local governments could tax businesses with no physical presence in the jurisdiction if the businesses engaged in enough indirect activity within the local jurisdiction to support a finding of
nexus.
In the Wayfair case specifically, the Court upheld a South Dakota law requiring any business — whether physically present or not — to pay sales taxes if it engaged in more than 200 individual transactions, or more than $100,000 in transactions, within the state on an annual basis.
In the Anderson case, the SC Administrative Law Court applied these Supreme Court decisions and found that DoorDash had a substantial nexus with Anderson because of its economic activities within the city. The court particularly emphasized that DoorDash received gross income of $1,940,388.10 in 2022 and $2,504,028.90 in 2023 from restaurant transactions within the City of Anderson, clearly in excess of the threshold amounts upheld in Wayfair.
The court granted Anderson's motion for summary judgment against DoorDash. Presumably DoorDash will now appeal the decision to the SC Court of Appeals, so a fuller resolution on the questions of licensing virtual businesses must wait for potential court decisions in the future. In the meantime, however, the law in South Carolina appears to hold that local governments can require virtual businesses to apply and pay for a business license.
Other implications of new court decision
The City of Anderson case highlights the evolving landscape of business operations and taxation, emphasizing the need for cities to assert their authority in the digital age. As local governments continue to navigate these complexities, the outcome of this newest court case sets a precedent for fair and equitable taxation of virtual businesses.
Even so, municipalities should consider two limitations in the conclusions that can now be drawn. First, the decision is likely to be appealed, which could change the case law on the matter. The Association will monitor the case and will provide timely updates to its members.
Second, the court’s analysis depends heavily on the transactional volume threshold in finding a sufficient legal nexus for taxation. Municipalities that seek to require virtual businesses to have a business license must include a minimum volume threshold before requiring a license.
The Association suggests that the annual thresholds should be at least at high as that approved in Wayfair, either
• more than 200 individual transactions, or
• at least $100,000 in total transactions.
Higher thresholds may be appropriate, depending on the municipality and its resources.