South Dakota v. Wayfair, Inc. – THE Case
On June 21, 2018, the U.S. Supreme Court ruled 5-4 in favor of overturning its 1992 decision in Quill, which set a standard requiring substantial physical presence before a state could enforce the sales tax collection responsibilities on a seller. In the current case, South Dakota v. Wayfair, Inc., writing for the Court’s majority, Justice Anthony Kennedy indicated “…the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decision in Quill Corp v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), should be, and now are, overruled.”
What does this mean for you? The short answer is that companies will now need to consider not only whether they have physical presence (or “boots on the ground”) nexus in a given state, but also whether their sales activity in a state exceeds certain “economic nexus” thresholds (such as the South Dakota threshold of $100,000 of sales or 200 annual transactions). If so, they will need to register with the state and collect and remit sales taxes. Note that the ruling only addresses the South Dakota legislation, which also was not retroactive. However, we can likely infer that the Court believes that the thresholds set by South Dakota are “substantial nexus” as required by another famous US Supreme Court state tax case in Complete Auto Transit, and that similar legislation passed by other states will also be held to be Constitutional. And since the June 2018 ruling, over 35 states have enacted economic nexus statutes similar to South Dakota’s. In short, if you’ve been putting off that nexus study…it’s time to revisit it. Also note that while this case related to online retailers, the ruling is not limited to e-tailers. This ruling impacts anyone selling into the state. (See below for a discussion about technology companies.)
Below Are Questions and Answers We Have Been Fielding About The Case And Its Impact On Companies:
Q: Since this case is about “economic nexus,” does that mean physical presence doesn’t matter anymore?
A: No. Physical presence does still matter. There is another U.S. Supreme Court case, (Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)), which introduced the concept of “substantial presence” as one of 4 prongs required in order for a state tax to be sustained as constitutional. Quill defined substantial presence to be a “significant physical presence.” Now, the Wayfair ruling indicates that not only does physical presence matter, economic nexus (the concept that a specific number of sales (i.e.; 200 transactions) or a dollar volume (i.e.; $100,000) can also be applied to determine if a company has created substantial presence. So, companies with nexus in a state because of employees, or inventory, or offices in the state still have nexus because they’d meet the substantial presence test under Complete Auto. But now, companies who may not have had a physical presence must apply the test for economic nexus—if a state has passed an economic nexus statute—to see if their sales volume alone passes the state’s minimum. If it does, the company is subject to collection and remittance of sales taxes.
Q: Do we need to start filing in the 45 states that have a sales tax immediately?
A: No, not immediately. But it’s time to do some analysis. As of April 1,2019, this law applies to most of the states which impose a sales tax. Approximately 35 other states have either enacted or are in the process of enacting similar laws with varying thresholds, enactment dates and enforcement dates. Here is a current list with enforcement dates, subject to change:
We are advising clients to review the past year’s volume of sales activity into any of these states (and even beyond) in order to get an accurate picture of their potential exposure and anticipated filing requirements. Can you wait a few weeks? Sure. A few months? Probably. A few years? Nope. We encourage this review to happen within the next quarter. Please note that the filing thresholds differ from state to state and a thorough analysis requires a review of each state separately. Can we help? Ask about our “Wayfair Diagnostic” to get you on track!
Q: Does this case address retroactivity? Are we going to have to go back many years and pay prior years’ taxes?
A: No. At least not in South Dakota and most others. South Dakota’s law specifically indicated that it was not retroactive. And the concurring Supreme Court justices liked that aspect. Recent laws passed in other states are also not retroactive. But there are a few with very early enactment dates. Also, one important thing to remember is that if you previously had created physical presence in a state but didn’t address the issue, those facts are still out there. So, if you want to come forward and begin filing now as part of an economic nexus threshold, you MAY still have a retroactive issue – not because of Wayfair specifically, but because you didn’t deal with it when physical presence was the standard. Also, a quick look at the calendar will let you know that if you’ve not yet begun to address the issue, you may have a retroactive issue to the enforcement date. In many states, over 6 months may have already gone by!
Have a question? Contact Monika Miles.