On June 21, 2018, the U.S. Supreme Court issued its decision in the South Dakota v. Wayfair, Inc. case with a 5-4 majority decision overturning precedent set by Quill Corp. v. North Dakota (1992). The decision upheld South Dakota’s economic nexus law, which requires companies to collect sales tax when their sales or the number of transactions sourced to the state exceed certain thresholds, regardless whether the seller company has a physical business presence in the state.
Previously, Quill set the controlling precedent for sales tax nexus. In this case, the Court determined that under the Dormant Commerce Clause a seller must have a physical presence in a state before the state can require the seller to collect and remit sales tax. Typically, physical presence was defined as having an employee, inventory, business property, or some type of physical location in the state. Under Quill, simply having remote sales into a state with no substantial physical presence there would not create sales tax nexus for a state to force companies to collect and remit sales taxes on its sales into the state.
New Economic Nexus Standard
To combat the limitations under the physical presence nexus standard and the lost sales tax revenue on the internet and other remote sales, some states have created economic nexus standards requiring out-of-state retailers of products and certain services to collect sales tax on sales made to consumers located within their borders if certain economic thresholds are met. Specifically, South Dakota passed a law stating that out-of-state retailers with more than $100,000 of sales or more than 200 transactions with consumers located in South Dakota must collect and remit South Dakota sales tax on those sales.
In the Wayfair case, Wayfair, Inc. sold home furnishings and other products to South Dakota customers through its website, Wayfair.com. The state of South Dakota deemed those sales to be sufficient to establish nexus there, since they exceeded the above economic nexus thresholds, and tried to force the company to collect sales tax on its South Dakota sales.
The Court in the Wayfair case found the Quill precedent to be inherently unfair for local sellers of products and services in today’s marketplace due to the emergence of the internet and e-commerce, which has provided internet sellers with no physical location in some states a clear advantage in the open market. The Court determined that South Dakota’s economic nexus thresholds were high enough that companies with sales exceeding those amounts to its consumers clearly availed themselves of the privilege of doing business in the state, creating deemed “substantial nexus”, despite lack of physical presence in the state. The Court, therefore, upheld the South Dakota law in this case.
Wide-Reaching Impact on Businesses
This momentous decision will undoubtedly have wide-reaching impact on sales tax collection and reporting requirements for remote sellers in many states where economic nexus standards exist, essentially permitting a state to require a seller 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 or more than 200 transactions to consumers in that state. It is presently uncertain exactly how states with lower economic thresholds than South Dakota’s may be impacted under this ruling.
Currently, over twenty states have current or pending legislation similar to South Dakota’s economic nexus law. With this Wayfair ruling, we expect that many more states will quickly move to implement similar economic nexus laws with varying sales and/or transaction thresholds that will require companies to thoroughly examine and adapt to new sales tax exposure in those states or face substantial penalties.
Our state and local tax (SALT) specialists at CoNexus CPA Group are very experienced in helping clients navigate the complex web of state sales tax laws all over the U.S. We can help your business determine its sales tax exposure areas and ensure compliance to avoid penalties. Please contact us at 770-980-1080 for assistance.