South Dakota v. Wayfair

On June 21, 2018, the United States Supreme Court delivered its opinion in South Dakota v. Wayfair, Inc., et al. The opinion overturned the Supreme Court's prior decision made in Quill Corp. v. North Dakota that an out-of-state vendor must have physical presence in the taxing state before the state can require the vendor to collect and remit sales tax. This decision will affect many online sellers and multistate businesses.

Prior to the Wayfair decision, a physical presence within the state was a requirement before the state could impose its sales tax on a business. If a seller's only connection with customers in a given state was by common carrier or mail, it lacked the requisite minimum contact with the state as required by the Due Process Clause and Commerce Clause. For example, maintaining a small inventory within a state created "nexus," yet having a large internet sales presence did not. This "physical presence" standard was established in the "Quill" case, litigated back in 1992. This case set a standard that a seller must be physically present within a given state in order to be required to charge, collect, and remit sales tax. The physical presence is a "brick and mortar" concept; for example:

• Property
• People
• Inventory/warehousing
• Or some other physical connection 

Additionally, the Quill case reaffirmed the standards of the "Due Process Clause" requirements and the "Commerce Clause" requirements.

Due Process Clause Requirements:

Due Process ensures that a seller's connections with a taxing state are substantial enough for the state to impose tax collection responsibilities.

Commerce Clause Requirements:

Nexus for Commerce Clause purposes is not as simple as the Due Process concept. Consequently, it can be more difficult to identify. The Commerce Clause test requires that a state tax: (1) be applied to an activity with substantial nexus to the taxing state, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services provided by the taxing state.

The Wayfair case centered on a South Dakota law that imposes sales tax collection obligations on certain remote (out of state) sellers, based on the dollar amount or volume of sales into the state. Specifically, a seller’s gross revenue from taxable sales of tangible personal property, products transferred electronically, or services delivered in South Dakota that exceed $100,000, or more than 200 deliveries of taxable sales within the state annually. The case examines the constitutionality of South Dakota's 2016 economic nexus law. The final determination in this case effectively overturned the old physical presence standard, as well as re-defined nexus as an "economic presence." Under the new standard substantial nexus exists when a seller avails itself of the privilege of carrying on business within a given state. Nexus will be determined based upon economic and virtual contact (the internet), sales volume, and dollar amount thresholds.  

Many states already have laws on their books, that by their plain language, exceed the "old" physical presence standard and assert nexus based on remote solicitation, creating in-state sales. For the most part, these laws have been unenforceable due to the "Quill case," and the physical presence standards it set. Some states have recently addressed the new standard set by the Wayfair decision; for example:

• The Maryland Comptroller's Office has issued immediate guidance on the implications of the recent Supreme Court decision. 

• The Arizona Department of Revenue has updated their Publication 623, entitled Nexus in Arizona. The publication now includes a discussion on the voluntary disclosure program, which is available to all businesses that want to be in compliance with Arizona's transaction privilege tax, use tax, and corporate tax laws. 

At this time most states are reviewing the ruling and its impact on their own states sales tax. Be assured that states will become much more aggressive in redefining and implementing their sales tax nexus laws. We will be following these developments closely, but in the meantime, sellers will need to analyze their sales in each state and that states nexus policy, including determining whether each product sold is taxable or nontaxable within the state. Additionally, the change from the old physical presence guidelines may in fact open the door to other taxes such as income tax, which could apply if the entity is conducting significant business activities within the state via indirect contact.  

With the arrival of new tax rules, businesses must cope with new difficulties. They are faced with understanding the new tax rules, implementing changes, and adjusting to a new normal. Please contact your trusted advisor here at Dermody, Burke and Brown, CPAs if you would like to discuss how the "Wayfair" decision may impact your business.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.