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Client Alert: Rules Have Changed for Sales Tax Collection by Out of State Vendors

What Happened?
In a landmark ruling, the U.S. Supreme Court overturned a 1992 decision that established the “Physical Presence Standard”. States may now compel out-of-state vendors to collect sales tax regardless of whether there is physical presence in the state.

On June 21, 2018, the U.S. Supreme Court announced its’ highly anticipated decision in South Dakota v. Wayfair overturning the physical presence standard set forth by Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Ill.

The case involved a challenge to South Dakota’s 2016 economic nexus statute, which imposes sales tax collection and remittance duties on out-of-state seller meeting gross sales and transaction volume thresholds. South Dakota enacted this statute as an emergency measure in order to stem the losses in tax collection it was suffering from remote, out-of-state retailers that were not required to collect sales tax on e-commerce sales to South Dakota residents. The statute was in direct conflict with the physical presence standard set forth by Quill, and was not to take effect until the Supreme Court ruled on its’ constitutionality.

Quill required that an out-of-state seller have a physical connection with a state before that state could assert jurisdiction to tax. Physical presence was necessary to establish the requisite “substantial nexus”, either through having property or employees in the state.

In a strongly worded opinion, the Court held that the physical presence rule in Quill  is an "unsound and incorrect" interpretation of the Constitution’s Commerce Clause which resulted in a “judicially created tax shelter”. The Court held that requisite substantial nexus was established through Wayfair’s "extensive virtual presence” that exceeded the statute’s minimum of $100,000 in annual sales or 200 annual transactions for goods or services delivered into South Dakota. These thresholds were high enough, so that in exceeding them, Wayfair had “availed itself of the substantial privilege of carrying on business in South Dakota”.

Many states have already taken the position that the physical presence standard does not apply to corporate income and franchise taxes. Most of these states have already enacted economic nexus statutes that establish a taxable presence based upon minimum thresholds of sales, property and/or payroll. Federal and state courts have consistently upheld these statutes while the U.S. Supreme Court had so far declined to hear cases in this area. Now with Wayfair, states can enforce these statutes and businesses can expect that more states will follow suit.

What Does This Means for Multistate Businesses?
As a result of the Court’s ruling in Wayfair, businesses can expect to see a rapid expansion of economic nexus statutes in the forty-four other states that have a sales tax. Most will likely be modeled on the South Dakota statute and will incorporate minimum sales and transaction volume thresholds as a way of protecting against future constitutional challenges.

Remote, out-of-state sellers are now faced with an obligation to collect sales tax in additional jurisdictions, while in-state sellers will welcome the parity that forcing remote sellers to charge and collect sales tax will create. Multi-state sellers will have to act quickly to determine if sales taxes should be collected in additional states. 

Contact Us
Advisors at Wolf & Company, P.C. are ready to consult with your business on how to proceed in this new landscape. Questions? Contact Joseph F. Burnett, CPA, Tax Senior Manager, at 617-428-5494 or jburnett@wolfandco.com.