In the 5-4 decision of South Dakota v. Wayfair, Inc., the Supreme Court of the United States ruled South Dakota’s economic nexus law constitutional. The decision has the potential to require online retailers and other remote sellers to collect and remit sales tax to states in which they do business, regardless of their physical presence within those states.
The decision overturned the physical presence standard established in the 1992 decision of Quill Corp v. North Dakota. That decision barred states from requiring out-of-state businesses to collect sales tax on purchases delivered to state residents unless those businesses had a physical presence within the state.
In the absence of Quill, the first question is whether the sales tax applies to an activity with substantial nexus with the taxing state. Such nexus is established when the seller avails itself of the privilege of carrying on significant business in the taxing jurisdiction. The Supreme Court’s decision found that large, national companies with an extensive virtual presence in South Dakota are engaging in a significant quantity of business within the state. The South Dakota statute applies only to sellers who exceed the thresholds of $100,000 in gross revenue or 200 remote transactions with in-state consumers on an annual basis. The Court found this quantity of business could not have occurred unless the seller availed itself of the privilege of carrying on substantial business in South Dakota.
The Court remanded the case to determine whether the South Dakota law violates other elements of the Commerce Clause. The Commerce Clause is a constitutional principle that prohibits states from passing legislation that discriminates against interstate commerce. However, the Court noted in their decision that several features of the law prevent discrimination including the economic thresholds, no retroactive application and South Dakota’s participation in the Streamlined Sales and Use Tax Agreement and simplification efforts.
The implications and scope of the Court’s decision are still uncertain, but it is likely that additional states will enforce and enact economic thresholds and may repeal collection laws related to physical presence.
Next steps include:
- Reviewing existing activities and the geographic footprint for those activities
- Reviewing product and service offerings to develop taxability determinations
- Ensuring proper exemption documentation is collected, retained, and regularly renewed
- Reviewing and considering whether technology investments are warranted
- Monitoring state and local sales/use tax updates, including developments regarding economic nexus thresholds
- Preparing for increased audit activity by state and local taxing jurisdictions
RubinBrown’s State and Local Tax (SALT) professionals can help to answer your questions or evaluate the impact that this decision may have on you and your business. Please contact one of the SALT professionals listed or your primary RubinBrown contact for assistance.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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