Yesterday, the United States Supreme Court released its 5-4 decision in South Dakota v. Wayfair permitting states to require online and other remote sellers with no physical presence in a state to collect and remit sales tax. Focusing on the sweeping changes in the retail sector over the past 25 years – including the rise of widespread internet sales – the Court overturned its 1992 decision in Quill Corp. v. North Dakota that prevented businesses with no presence within a state's borders from being required to collect sales tax.
Wayfair represents a sea change in sales and use tax administration. Many states already enacted new economic nexus provisions in anticipation of Quill's physical presence standard being overturned, and others are now sure to follow. In any state that adopts economic nexus, most remote sellers will be required to collect and remit sales tax if they have significant sales into the state. Businesses will likely be subject to varying economic nexus standards as states seek to maximize new streams of revenue. Congress will also likely be invited to weigh in, and the Court's decision makes congressional action more likely now than ever.
Nonetheless, Wayfair leaves open several avenues for remote sellers—especially small businesses with de minimis contacts with a state—to raise challenges to economic nexus provisions. Importantly, Wayfair suggests that taxpayers can challenge economic nexus standards under Pike v. Bruce Church if the standards impose "clearly excessive" burdens. In addition, as explained in our recent article, due process nexus may become increasingly important given the ruling in Wayfair because the due process clause should prevent a state from imposing tax compliance burdens that significantly outweigh the benefits a taxpayer receives from the state. The full article, "New Horizons in Due Process Nexus," was published by State Tax Notes on June 18, 2018, and is available online (subscription required).
In Tennessee, the Department of Revenue's economic nexus regulation has currently been put on hold by the General Assembly pending the resolution of a state-court lawsuit challenging the regulation. The decision in Wayfair will not make economic nexus immediately effective in Tennessee, and the General Assembly will still be required to approve the Department's economic nexus regulation before it takes effect. In its current form, the regulation would require businesses with at least $500,000 in sales to Tennessee customers over a 12-month period to collect and remit sales tax. Any action by the General Assembly is likely to be hotly debated, and the issue will likely be taken up in the next legislative session with opportunities for those impacted to weigh in during the process.
We can expect issues arising from Wayfair to create a wave of controversy for years to come, as economic nexus becomes the new standard and the bright-line physical presence standard is eliminated.