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Publications | June 25, 2018
2 minute read

U.S. Supreme Court’s Wayfair Decision Overturns “Physical Presence” Nexus Requirement for Collection of Sales Tax

The U.S. Supreme Court’s decision concerning South Dakota v. Wayfair, Inc. dramatically changes the ability of a state to tax the sales of an out-of-state seller of goods. The decision overturned the physical presence stance in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Ill. This means that states are now able to require out-of-state retailers to collect and remit state sales/use taxes on sales to in-state customers, even though the retailer has no “physical presence” nexus in the state.

Under this “physical presence” test required under the Supreme Court’s 1992 Quill decision, a seller must generally have an office, other place of business or employees in the taxing state in order to have sufficient nexus to be required to collect sales/use taxes from the in-state purchaser. The Wayfair Court overturned the Quill “physical presence” nexus test and found that there is sufficient nexus to require out-of-state retailers to collect and remit South Dakota sales/use tax, when an out-of-state retailer has South Dakota sales of more than $100,000 in a year or 200 (or more) separate sales to South Dakota residents during the year.

The Wayfair Court found that the Quill “physical presence” test did not make sense in today’s e-commerce economy. The Court pointed out that mail order sales activity at the time of the Quill decision was approximately $180 billion, while e-commerce sales in 2017 were estimated at $453.5 billion, and when combined with traditional remote sales totaled more than $500 billion. The Court stated that the Quill test gives online sellers an unfair advantage over brick-and-mortar sellers. The Court also pointed out that the “physical presence” test has resulted in a significant loss of revenue to states imposing a sales/use tax. Estimates of this revenue loss range from $8 billion to $33 billion. While online purchasers are generally required to report and pay use tax in their home state, there is substantial noncompliance with these rules.  

The Supreme Court found that the $100,000/200 sales test in the South Dakota statute, and the lack of retroactivity, means that the statute does not impose an undue burden on interstate commerce. While the Supreme Court upheld the South Dakota statute, it did not establish a sales/use tax nexus rule applicable to all states. The decision therefore leaves many unanswered questions, such as whether lower threshold amounts would provide sufficient nexus. Another issue to address is whether higher thresholds may be permitted in states with larger populations than South Dakota.
Although unanswered questions remain, the Wayfair decision nevertheless substantially changed the landscape for online sellers. Other states are expected to impose similar sales/use tax collection requirements. Stay tuned.  

If you are interested in learning more about this recent decision and other tax issues affecting your business, please contact Sean Cook, Jay Kennedy, Stephen Kretschman or your Warner attorney.