On June 21, 2018, the United States Supreme Court ruled in South Dakota v. Wayfair that a taxpayer does not need to establish physical presence in a state in order for the state to subject the taxpayer to its sales tax laws. The decision reversed the Court’s 26-year-old precedent from the 1992 case Quill Corp. v. North Dakota.
In Quill, the U.S. Supreme Court ruled that the Commerce Clause of the United States Constitution prohibits states from requiring an out-of-state retailer to collect and remit sales tax if the retailer does not have a physical presence within the state. The Court reasoned that imposing such compliance obligations on retailers unconstitutionally burdens interstate commerce. The result of Quill’s physical presence rule was that retailers, especially online retailers and other remote sellers, did not have sales tax nexus in states where they were not physically present.
In 2016, South Dakota enacted an economic nexus standard, which directly contradicted Quill’s physical presence rule. The South Dakota statute requires that all retailers with either $100,000 in gross revenue or 200 or more transactions per year must collect and remit sales tax. After the state tried to enforce its expansive nexus standard, online retailers Wayfair, Overstock.com, and Newegg challenged the law in court. The South Dakota State Supreme Court sided with the retailers and found the economic nexus statute unconstitutional under Quill. South Dakota appealed to the U.S. Supreme Court, which agreed to hear the case.
In Wayfair, the U.S. Supreme Court reversed Quill’s physical presence rule for sales tax nexus. The Court ruled that the physical presence rule has arbitrarily created competitive advantages for out-of-state retailers since it was first set forth in 1992. Furthermore, the market distortions created by the rule have been exacerbated by recent technological advancements and the modern economic realities of internet retailing.
The Wayfair ruling will significantly impact remote sellers of tangible personal property and taxable services who have historically taken no-nexus positions pursuant to Quill. In light of the ruling and its changes to the multistate sales tax nexus landscape, there are some practical considerations and steps that retailers should take to prepare:
- Reassess current multistate filing and nexus positions;
- Perform systems readiness assessments to prepare for tax collection and filing obligations in additional states;
- Consider prior period exposures and mitigation opportunities in preparation for increased enforcement activity; and
- Proactively develop a strategy for mitigating exposure and audit risk through voluntary disclosures or amnesty programs where appropriate.
GBQ SALT professionals are available to assist taxpayers in understanding the impact of the Wayfair decision on their specific circumstances and business activities. Additionally, in the coming weeks, GBQ will provide publications and seminars with greater detail about the effects of the decision.