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Tag Archive for South Dakota V. Wayfair

Happy Anniversary – The South Dakota V. Wayfair Inc. Decision

Monika Miles On Wayfair Decision

It’s been just over a year since the U.S. Supreme Court handed down its landmark decision in South Dakota v. Wayfair Inc. on 6/21/18. This key ruling  paved the way for  states to enact economic nexus legislation and thereby more easily require companies to collect, remit and report sales tax.  This decision quickly changed the sales tax world in a big way, particularly for on-line retailers, but also for many other companies.

The Supreme Court’s ruling in June 2018 overturned the Quill decision of 1992 which established physical presence for nexus standards. The Wayfair decision established the concept of economic nexus, but did not automatically make economic nexus the law of the land for all 50 states. The High Court’s decision was that South Dakota’s economic nexus law was constitutional. Since this ruling, most states have  enacted some type of economic nexus legislation as it pertains to sales tax. As we describe in a previous blog, economic nexus is based upon the amount of sales or number of transactions in the state. If a certain threshold is met, nexus is deemed to be created. For instance, in South Dakota, economic nexus is created in if an out of state company makes sales of products or services into South Dakota in excess of $100,000 or has 200 or more transactions.

What have We Learned?

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South Dakota V. Wayfair:  What Constitutes Substantial Nexus?

Gary Heald, South Dakota V. Wayfair

Historically, online retailers needed to be physically present in a state in order to be compelled by a state to collect state sales tax.  The physical presence requirement resulted in an inefficient “online sales tax loophole.”  In a 5/4 split the Court determined that the “anachronistic” Quill physical presence standard was impractical and effectively discriminated against in-state sellers.  Requiring physical presence gave out-of-state retailers an advantage – consumers would purchase goods from them at an overall discount, because the retailer could not be compelled to collect the sales tax.  Now, with a more fair economic nexus rule, the Court has leveled the playing field as physical presence is no longer necessary to meet the nexus standard or full-test established in Complete Auto Transit v. Brady.

Now, states can require remote sellers to collect state sales tax, as long as the Complete Auto Transit test is met.  The test requires that:  (1) the tax applies to an activity with a substantial nexus with the taxing state; (2) whether the tax is fairly apportioned; (3) whether the tax discriminates against interstate commerce; or (4) whether the tax is fairly related to services provided by the state.[1]

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More States Impose Sales Tax On E-Commerce Sales

Over the last few decades, states have had the opportunity to broaden their income and franchise tax base by ensnaring a larger proportion of out-of-state taxpayers in their taxing regime through adoption of broad economic or factor-based economic nexus standards.

However, states have traditionally struggled to do the same with respect to their sales and use tax base because of the long-standing United States Supreme Court nexus decision in Quill Corp. v. North Dakota (1992).” 1 For nearly three decades, the dicta contained in Quill have prevented states from adopting economic-based nexus
standards with respect to sales and use taxes, requiring instead a more stringent physical presence standard (or “substantial nexus”).
The Supreme Court has repeatedly declined to hear challenges or cases related to Quill, until recently. Read more