The U.S. Supreme Court recently issued the most important state and local tax opinion in 25 years. That opinion, South Dakota v. Wayfair, Inc., overrules the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. In Quill, the U.S. Supreme Court reaffirmed that states could only impose their taxes on those businesses with nexus with the state, and stated that only businesses with a physical presence in a state had nexus. However, in Wayfair, the Court rejected the physical presence standard and found a South Dakota law imposing an economic nexus standard to be constitutional. But, the Court left open the question of what the new constitutional standard for nexus would be. This blog post discusses the Wayfair decision and its implications in more detail.
The South Dakota Bill
In 2016, South Dakota passed a law that stated that certain remote sellers with no physical presence in South Dakota were required to collect and remit South Dakota sales tax. The law applies an “economic nexus” standard, and states that remote sellers must collect and remit South Dakota sales tax if their sales into South Dakota exceed $100,000 per year or they make 200 or more sales into South Dakota per year. The South Dakota bill included a statement that the South Dakota legislature intended this bill as a vehicle for South Dakota to challenge Quill‘s physical presence nexus requirement.
The Wayfair Opinion and Its Implications
The U.S. Supreme Court soundly rejected Quill‘s physical presence standard. In doing so, the Court noted that the Quill Court’s stated desire to bring clarity to taxpayers with a bright line test had been increasingly unsuccessful in light of the technological changes that had occurred since the Quill decision. Not only was the physical presence test unwieldy and discriminatory, according to the Court, but it went against modern Commerce Clause jurisprudence, which calls for “a sensitive, case-by-case analysis of purposes and effects.” Thus, though the Court held that the South Dakota economic nexus standard was constitutional, the Court did not create a bright-line rule for a finding of nexus.
Many states currently still have a physical presence standard on their books. The Wayfair decision makes it likely that many states will now change their standards, though it is unclear which standards the states will apply. The state courts will likely decide the validity of any new standards enacted by the states in litigation. Therefore, it seems that many taxpayers without physical presence in states where they make sales may now potentially be subject to state tax obligations.
In the wake of the Wayfair decision, sellers who make many remote sales into state where they have no physical presence may choose to seek the advice of a tax professional, such as a tax attorney, to clarify their potential future tax obligations.
