Wayfair Outcome: Do I have to Collect Sales Tax Now?
Friday, June 22nd, 2018
Out-of-state sellers that do not have a physical presence in states where they sell goods or services are now much more likely to be required to collect sales and use tax in such states.
On June 21, 2018, the United States Supreme Court decided to uphold South Dakota's economic nexus law in South Dakota v. Wayfair. South Dakota's economic nexus law requires an out-of-state seller to collect and remit sales and use tax if, during the current or previous calendar year, the seller (1) made 200 or more separate sales into the state, or (2) made sales of more than $100,000 into the state. The law applies even if the out-of-state seller does not have a physical presence in the state.
South Dakota's nexus law is significant because in 1992 the Supreme Court provided in Quill v. North Dakota that a state could not require an out-of-state seller to collect sales and use tax unless the seller had a "substantial nexus" with the state. In Quill, the Court held that substantial nexus meant that the seller had to have an actual physical presence in the state, like an employee or property. Pointing to Quill, three online retailers (Wayfair, Overstock, and Newegg) argued that South Dakota's economic nexus law was unconstitutional. However, the Supreme Court upheld South Dakota's law in Wayfair, striking down Quill's physical presence requirement in the process.
Even with the Wayfair decision, it is important to note that states still cannot require an out-of-state seller to collect and remit sales and use tax unless the seller has a "substantial nexus" with the state. The Wayfair decision says that substantial nexus does not require physical presence. The case does not clearly and completely define substantial nexus. It only says that (1) substantial nexus does not require physical presence and (2) South Dakota's economic nexus law qualifies as substantial nexus. The case also does not address other constitutional limitations on a state's ability to require remote sellers to collect sales and use tax.
In the wake of this ruling, states that rely on sales and use tax revenue will likely pass laws similar to South Dakota's, if they have not done so already, or more aggressively assert nexus. Several states have already enacted economic nexus laws. These states include Alabama, Rhode Island, Washington, Georgia, Hawaii, Illinois, Kentucky, Arizona, Wyoming, Indiana, Vermont, Maine, Massachusetts, Tennessee, Mississippi, and Louisiana.
So, do you have to collect sales tax now? Before Wayfair a remote seller could look at its collection obligations through the lens of physical presence. Even in states that had economic nexus rules, for example, a remote seller could reasonably believe it had no nexus if it had no physical presence. Now, however, remote sellers should look at each state's nexus rule and ask whether the activities directed at the state are substantial. We know that, by one measure, "substantial" includes 200 sales or $100,000 in sales over the course of a year. Stay tuned.
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