In a decision dated June 21 – South Dakota v. Wayfair – the Supreme Court held that no “physical presence” is required for a state to impose sales tax collection obligations on out-of-state vendors. This decision overturned the 1992 Supreme Court decision Quill v. North Dakota, which held that for a state to be able to compel an out-of-state vendor to collect sales tax, the vendor must maintain some physical presence within the state. Wayfair is certain to have a widespread impact on many businesses.
The Wayfair Court explicitly overruled Quill and abolished the physical presence requirement, which the Court found was “unsound,” “incorrect,” “arbitrary,” “formalistic” and “removed from economic reality.” The majority reasoned that, because of the prevalence of e-commerce, physical presence alone is no longer a valid indicator of true presence. Instead of solving market distortions, Quill created market distortions and provided a disincentive to having any physical presence within a state.
Importance of Wayfair
The Court held that, although physical presence is not required, there must be a “substantial” nexus for a state to compel sales tax registration or collection by an out-of-state vendor. South Dakota’s statute, which requires out-of-state vendors to collect sales tax only if they derive more than $100,000 of revenue or 200 sales from within South Dakota, was “clearly sufficient.” However, the Court declined to address the constitutionality of a sales tax collection requirement that lacks these or similar protections.
It is unclear whether states will need to amend their statutes to specifically provide an “economic nexus” standard or whether existing laws could be sufficient in certain circumstances. Because South Dakota’s law was drafted to apply prospectively and the Supreme Court declined to rule or set limits on retroactive application, it is also unclear whether states could impose the collection requirement retroactively. Currently, over 20 states in addition to South Dakota have already implemented economic nexus rules, and several others have legislation in progress.
Complexity of Wayfair’s Consequences
Businesses that make sales to customers in states where the businesses have no physical presence should be aware of potential registration and collection requirements, especially if they have sales to customers in states that have enacted – or are in the process of enacting – economic nexus statutes. Given the uncertainty with respect to retroactivity, businesses should also consider potential registration and collection requirements in states in which they have material sales.