Many businesses have historically enjoyed the privilege of avoiding collecting sales tax on sales in states in which they don’t have a physical presence. Due to a recent Supreme Court decision, that’s all about to change, and you should prepare for the impact this will have on your operations and finances. Sellers will no longer need to have a physical presence in a state before imposing sales or use taxes.
In a much-anticipated decision, the United States Supreme Court in South Dakota v. Wayfair overturned the longstanding precedent established by Quill v. North Dakota that required out-of-state sellers to have physical presence in a state before the state could impose sales and use tax obligations on them. The Court called the Quill physical presence standard “unsound and incorrect,” before eliminating it as a prerequisite to meeting the substantial nexus test required under Commerce Clause jurisprudence.
As a result, the state’s right to impose sales tax obligations is established if the seller avails itself of the privilege of carrying on business in the state without needing to have a physical presence.
The South Dakota law at issue in Wayfair applied sales tax collection and remittance obligations only to out-ofstate sellers that sold more than $100,000 of goods or services in South Dakota or engaged in 200 or more separate transactions for the delivery of goods and services into the state annually. The Court determined that these thresholds could not have been met unless a remote seller availed itself of the substantial privilege of carrying on business in South Dakota, which was true in this case because of virtual presence maintained by plaintiffs Wayfair, Inc. and Overstock.com.
Noting that other principles of the Court’s Commerce Clause doctrine applicable to state taxes not litigated might invalidate the South Dakota law, the Court remanded the case. Although it declined to reach those issues, it signaled that the law appeared not to discriminate against or place undue burdens upon interstate commerce.
What you need to know regarding the Wayfair decision is that states are now able to enforce economic nexus standards against out-of-state retailers, including among others, on-line retailers. Many states have already adopted laws by which they may assert nexus on remote sellers. Those that do not are expected to quickly do so.
Be sure to speak with your tax advisor to review the ways in which this decision could impact your business.
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