South Dakota v Wayfair

Could This Be the End of Physical Presence Nexus?

On April 17, 2018, the Supreme Court of the United States heard oral arguments in South Dakota v. Wayfair, et al. South Dakota is challenging, and attempting to have overturned, the physical presence nexus standard for the collection of sales and use taxes that was re-affirmed 26 years ago in Quill Corp. v. North Dakota. South Dakota enacted its economic presence nexus statute for sales and use tax collection on March 22, 2016. The effective date of the legislation is stayed, pending the resolution of the Wayfair case. Under the statute, a remote seller is required to collect and remit sales tax if: (1) the seller’s South Dakota sales exceed $100,000; or (2) the seller has more than 200 separate sales transactions into South Dakota.

While the matter is ongoing, the pure fact that the court is willing to hear this case makes it worthwhile for anyone doing business across state lines to pay attention – and not just in South Dakota.

Key Observations

  • During oral arguments, the Justices appeared focused on: whether congressional legislation is still the better approach to moving on from the physical presence nexus standard; the retroactive effect of a decision overruling Quill; what is a constitutional minimal economic threshold; and the impact on, including costs of compliance for, small businesses.
  • If the Court overturns Quill, it is likely that more states will be encouraged to enact similar sales/use tax economic nexus legislation.
  • If the Court upholds Quill, it is likely that states will become even more aggressive in pushing the envelope of physical presence nexus. Affiliate, attributional, “click-through,” software and “cookie” nexus will likely become even greater focus areas for states.
  • Depending on the outcome of the Wayfair decision, federal legislation that has been pending in the U.S. Congress for some time could get a boost.

Potential Implications

The current physical presence nexus means a state can generally only impose sales tax on a company if that company has some type of physical presence in a state. Physical presence can include, but not be limited to, resident employees working from their homes or in rented offices, business development activities, relationship management activities, solicitation and the performances of services (e.g., training, implementation, repairs, etc.). Moving from a physical presence nexus to an economic nexus means companies who only have a physical presence in Massachusetts may be required to collect and remit sales taxes in every state where they have sales.

If you have questions about how your company handles State and Local Tax or how the outcome of this court decision could affect your company, please connect with us.

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