On June 21, 2018, the U.S. Supreme Court issued an opinion in the South Dakota v. Wayfair case, eliminating the decades-old “physical presence” condition for sales and use tax nexus.
The case was based on a South Dakota law that imposes sales tax collection obligations on certain remote sellers, based on the dollar amount or volume of sales into the state. The final ruling impacts thousands of state and local jurisdictions across the United States that impose sales or use tax.
South Dakota v. Wayfair
In South Dakota v. Wayfair, the U.S. Supreme Court considered the constitutionality of South Dakota’s S.B. 106, enacted in March 2016. The law, requires certain remote sellers to register for, collect, and remit South Dakota sales tax. A remote seller has sales tax nexus with South Dakota if the seller, in the current or previous calendar year:
- had gross revenue from sales of taxable goods and services delivered into the state exceeding $100,000; or
- sold taxable goods and services for delivery into the state in 200 or more separate transactions
South Dakota’s law was designed to create an express route to the U.S. Supreme Court in an attempt to overturn the Court’s Quill precedent. The law included procedural protections for taxpayers that prevented retroactive collection.
Assessing the impact of Wayfair
While the Wayfair ruling strikes down the physical-presence requirement, it is not a blanket approval of all virtual or economic nexus policies. The Court cited several features of South Dakota’s economic nexus law that weighed in favor of upholding it, including that:
- the law provides a sales threshold (protecting de minimis sellers);
- the law is not retroactive (reducing the burden on small merchants and the likelihood of double taxation); and
- the state is a party to the Streamlined Sales and Use Tax Agreement (SSUTA) (reducing the compliance burden on multistate sellers without a traditional physical footprint in a state)
The greatest immediate impact will be on sellers with a significant virtual or economic presence in a state that asserts economic nexus. For certain types of sellers – those that operate only on a local, in-person basis, and do not maintain an economic or digital presence outside of that state – Wayfair should have little to no direct impact. However, all sellers should reexamine their nexus determinations in light of the decision and current state laws.
Sellers delivering taxable products or services into South Dakota will need to determine if their sales surpass the dollar amount or transaction volume thresholds for establishing nexus in the state. Sellers should complete this analysis for each state that has adopted an economic nexus threshold policy, and will need to determine whether each product sold is taxable or nontaxable under the laws of the state. Note, however, that sales of taxable products in exempt transactions (e.g., sales to exempt organizations) may nevertheless count toward a state’s economic nexus threshold.
Functions of e-commerce, such as websites that leave “cookies” on customer hard drives and apps that can be downloaded on customer phones, further complicate nexus standards. While the issue of “cookie” nexus was not directly before the Wayfair Court, the majority opinion cited the existence of cookie nexus policies as an indication of the unworkable nature of the physical presence standard.
Sellers should be prepared for states to aggressively enforce expanded nexus provisions, although future challenges or Congressional action could limit the scope of Wayfair.
For sellers currently under audit, the question of retroactivity is nuanced and will need to be determined after careful review of the laws and procedures of the states at issue and, if relevant, the Multistate Tax Commission.
Additional provisions to nexus ruling?
As states, businesses, courts, and consumers react to the Wayfair decision, Congress may choose to intervene and provide guardrails or minimum standards for remote sales tax collection. If you have any questions on how this may affect your business for 2018, please do not hesitate to contact our office.