In the landmark decision of South Dakota v. Wayfair, Inc., the US Supreme Court overturned the Quill physical presence standard, deeming it “unsound and incorrect.” In turn, the Court upheld South Dakota’s economic nexus law, which requires companies to collect sales tax when their sales or the number of transactions with the state exceed certain thresholds.
Physical Presence Flaw
Prior to this ruling, Quill Corp. v. North Dakota (1992) was the controlling precedent for sales tax nexus. In Quill, the Court ruled that the Commerce Clause requires a taxpayer to have physical presence in a state before the state can require a taxpayer to collect and remit sales tax. Generally, physical presence meant having an employee or physical location in the state. However, the physical presence standard proved to be inherently flawed.
With the internet’s emergence, remote sellers had a distinct advantage in the marketplace. The Court went as far as to characterize the physical presence standard as a “judicially created tax shelter.”
In recent years, states have gone to great lengths to remedy this judicial distortion. In a direct challenge to Quill, South Dakota passed a law stating that out of state retailers must collect sales tax on sales made into the state if the retailer has more than $100,000 of sales or more than 200 transactions in the previous year.
Notably, the law did not apply retroactively. Upon overruling Quill and the physical presence standard, the Court determined that Wayfair could have only exceeded South Dakota’s sales or transactional thresholds by having substantial nexus with the state. As a result, the South Dakota law was upheld.
The Takeaway – Rampant Nexus
In no uncertain terms, this historic Wayfair decision changes the landscape of sales tax collection for remote sellers. In effect, this ruling permits a state to force a company with no physical presence in the state to collect sales tax on sales made into the state if they have more than $100,000 in sales and/or more than 200 transactions in the previous year. Additionally, it remains unclear if states with lower thresholds (e.g., $10,000 in sales) are valid under this ruling.
To date, approximately twenty states have either enacted economic nexus laws like South Dakota’s or have legislation pending that would do so. With this ruling, the expectation is that most states will adopt similar economic nexus laws with various sales or transactions thresholds.
This ongoing development highlights the urgent need to undergo a thorough study of state sales tax nexus.
Bennett Thrasher’s state tax team has extensive knowledge of and experience with state economic nexus laws. Therefore, we are uniquely positioned to immediately assist clients with understanding and complying with sales tax collection obligations under the new Wayfair rules.
For more information on the Wayfair decision or for any tax-related concerns, please contact a Bennett Thrasher tax advisor by calling 770.396.2200 or learn more about how we can partner to meet your goals.
The above information is general in nature and should not be relied upon for any specific tax implication or investment decision. Actual results may differ, and readers are cautioned not to place reliance on these general observations. Consult with your adviser or counsel before undertaking any specific action.