On June 21, 2018, the Supreme Court of the United States handed down a historic decision in the sales and use tax nexus case South Dakota v. Wayfair, Inc. The 5-4 ruling overturns physical presence standards upheld in previous cases, such as Quill Corp. v. North Dakota (1992) and National Bellas Hess Inc. v. Department of Revenue of Illinois (1967), where a business had to have a physical presence in the state for the state to impose sales and use tax collection obligations on the business.
Nexus describes the amount and degree of a taxpayer’s connection with a state before the taxpayer becomes subject to the state’s taxing jurisdiction. If a taxpayer has established sales and use tax nexus, the state will require the taxpayer to register, collect and remit sales and use taxes on sales made to purchasers in that state.
States exercise their power to tax through statutes, case law, regulation or policy. Generally, state statutes are broadly written and include phrases such as “doing business in” or “deriving income from” to describe activity that will trigger nexus and thus a filing obligation. Statutes tend to vary from state to state.
In recent years, many states have become more aggressive in enacting various statutes that require out-of-state sellers to collect and remit sales tax. Over half of the states that impose a general state-wide sales taxes now have addressed a form of “economic” nexus, where nexus is generally established based on a certain threshold of economic activity in a state rather than just a physical presence.
Significance of the Wayfair case
In 2016, South Dakota passed an economic presence statute that required out-of-state sellers to collect and remit sales tax as if the seller had a specified level of activity in the state. This new standard applied if the business delivered more than $100,000 of goods or services in South Dakota or engaged in 200 or more separate transactions in South Dakota in the current calendar year or the prior calendar year. The case was ultimately heard by the U.S. Supreme Court, which concluded that the physical presence rule of Quill is “unsound and incorrect.” By overturning Quill, the Court opened the possibility for states to impose sales tax collection obligations (and perhaps other taxes) based on economic presence.
The U.S. Supreme Court’s decision in Wayfair will affect companies that have economic presence in a state that meets that state’s nexus standard within the Court’s new ruling. It especially impacts online businesses where, in the past, the lack of a physical presence prohibited a state from imposing sales and use tax collection requirements on those businesses. Most immediately, out-of-state sellers that deliver goods or provide services into a so-called “economic presence” state will need to determine if the business exceeds the state’s specific economic sales or activity thresholds, generally in the prior calendar year or previous 12 months. Currently, at least 25 states have enacted economic nexus models with varying enforcement dates. Other states are issuing nexus guidance suggesting economic nexus policies may be enacted. Sellers may need to conduct an analysis on each state that has adopted, or plans to adopt, economic nexus threshold requirements for sales and use tax collection to ensure they are in compliance with all jurisdictions (state and local) in which they have customers. It is also reasonable to expect that states may use this ruling to determine economic nexus thresholds for state income tax purposes as well.
Now is the time to review your sales and use tax compliance requirements.
States Take Action
Response to Wayfair decision
Its economic nexus rule, which went into effect in 2016, will be applied to sales made on or after October 1, 2018.
As of July 1, 2018, nexus is established by receiving more than $100,000 in gross income from sales to Hawaiian customers or engaging in 200 or more separate transactions involving the sale of goods and services.
The state is updating its policies and is set to begin enforcing its economic presence standards on October 1, 2018.
Its new economic nexus provisions, set to begin January 1, 2019, aren't affected by the Wayfair decision.
Wayfair confirms the economic nexus provisions already in place in the state.
Existing law is similar to South Dakota law. The state is currently conducting meetings to refine its system for collecting taxes by January 1, 2019.
It will impose sales and use tax requirements to the full extent allowed under the U.S. Constitution.
The state law affecting online sellers, which went into effect in 2017, continues to apply and isn't affected by Wayfair.
It will begin collecting sales tax from online sellers, effective October 1, 2018.
The state legislature has approved a bill imposing sales tax on online sellers that, if enacted, would become effective October 1, 2018.
Remote retailers that don't meet the small-seller exception must begin collecting sales or use tax by the later of October 1, 2018, or 60 days after the remote retailer meets the exception threshold.
A reminder has been issued about the registration options available to remote sellers, including using the Streamlined Sales Tax Registration System.
The state taxing authority maintains that its current law is enforceable under Wayfair.
Once the injunction is lifted, it will require certain online sellers to remit sales tax in accordance with state law.
It's reviewing Wayfair and will update its rules as necessary. No change is expected before 2019.
The state legislature approved a law establishing economic nexus provisions for sales and use tax purposes, effective January 1, 2019.
Economic nexus provisions enacted in 2016 are now effective.
Remote retailers must collect and remit sales tax starting October 1, 2018. The provisions include a small-seller exception threshold of $100,000 or 200 separate transactions.
Several other states — including California, Idaho, Mississippi, Nebraska, New York, Washington and Wyoming — are reviewing the Wayfair decision and are expected to issue new guidance soon. Other states have announced they're analyzing the decision to determine how it affects them and what next steps they should take.