On June 21, 2018, the U.S. Supreme Court (Supreme Court) upheld South Dakota’s economic nexus provisions for sales and use tax in a historic decision. The Supreme Court held in favor of South Dakota’s nexus standard to impose sales tax collection responsibilities on out-of-state sellers with $100,000 in sales and/or 200 transactions into the state. Since physical presence is no longer required for sales tax collection, this court ruling would affect remote sellers engaged in online commerce as well as domestic and international companies with multistate sales in traditional business environments.
It all started in a direct challenge to the physical presence requirement of Quill Corp. v. North Dakota, 504 U.S. 298 (1992) when South Dakota enacted the law requiring sellers without a physical presence in the state to collect South Dakota sales tax on sales into South Dakota if, in the previous or current calendar year, the seller’s sales into South Dakota exceeded $100,000 or the seller had 200 or more separate transactions into the state. South Dakota consequently brought suit against major online retailers Wayfair, Inc., Systemax, Inc., Overstock.com, Inc. and Newegg Inc., and the Supreme Court granted cert.
The Supreme Court once again endorsed the four-prong test in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) as the correct analytical framework. Complete Auto provides that a state tax will be upheld if it “(1) applies to an activity with substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the state provides.” The Supreme Court ultimately overturned the physical presence standard of Quill on the grounds that it is unnecessary to meet the substantial nexus requirement of Complete Auto. The Supreme Court further stated:
[w]hen considering whether a State may levy a tax, Due Process and Commerce Clause standards may not be identical or coterminous, but there are significant parallels. The reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for amount-of-state seller’s liability to remit sales taxes. Physical presence is not necessary to create a substantial nexus.
Thus, the concept of due process may still conform to commerce clause nexus as articulated in Quill. However, substantial nexus is now less defined prior to the Wayfair decision.
Moreover, the Supreme Court did not directly address the issue of retroactivity. The Supreme Court also did not directly address which nexus laws unduly burden interstate commerce or fail to meet the substantial nexus requirement (even though physical presence is no longer required). Per the Supreme Court: “these issues are not before the Court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses.”
Similar to Quill, Congress is again being urged to take action. The Supreme Court said “[a]nd in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so.” Justice Kennedy authored the majority opinion, joined by Justices Thomas, Ginsburg, Alito and Gorsuch. Justices Thomas and Gorsuch also filed concurring opinions. Justice Roberts dissented, joined by Justices Breyer, Sotomayor and Kagan.
A number of states have already enacted similar economic nexus laws in anticipation of this decision, and more states will follow suit in the upcoming months. As a result of the Wayfair decision, both domestic and international companies—even those without any physical presence in the U.S.—will need to address the increased sales and use tax compliance responsibilities regardless of their business type and current nexus activities.
For more information or to evaluate the effects and implications of this case for your company, contact Jana, Rick or your trusted BKD advisor.