The United States Supreme Court has eliminated the "physical presence" standard – the cornerstone of US state sales and use tax nexus for over 25 years. See South Dakota v. Wayfair, Inc. U.S., No. 17-494 (June 21, 2018).
In 2016, South Dakota sought to require sellers with over $100,000 per year in sales or at least 200 "separate transactions" with South Dakota customers to collect and remit sales tax even if the sellers had no physical presence in the state (a so-called "economic nexus").
The Supreme Court determined that expanding the sales tax collection nexus based on certain limited criteria of economic nexus (as South Dakota had done) would generally neither offend the Due Process clause of the US Constitution nor disrupt interstate commerce in violation of the Commerce Clause of the US Constitution. The Supreme Court then remanded the case to the state courts to determine if there were any remaining constitutional bars to the expanded nexus rule in South Dakota.
The likely outcome of this decision: taxpayers should expect states with sales and use taxes to adopt sales tax nexus provisions similar to the South Dakota law that was upheld in Wayfair, and perhaps even to expand the scope of such economic nexus and other forms of nexus for sales and use tax collection.
Thus, entities that sell tangible personal property or provide services remotely to consumers in such US states (including entities outside the US) can be required to collect and remit sales tax to a state if such taxation satisfies the US constitutional requirements of due process and the Commerce Clause.
While Wayfair addressed sales of tangible personal property that are clearly subject to tax, many states have in recent years extended their sales and use taxes to software as a service, digital goods and other online products and services. If your company makes sales of tangible personal property, software as a service, digital goods and other online products and services to customers in US states with sales and use taxes, it may be required to register, collect and remit taxes in those states in the near future. These new laws will undoubtedly increase the time, money and effort that remote sellers must devote to state and local tax compliance, including registering as a vendor to collect sales and use tax in multiple states.
It is also critical for buyers and sellers of software products and services, especially products and services transferred electronically, accessed remotely or acquired for incorporation into a subsequent end-user product or service, to be aware of the tax pitfalls and to carefully document their products and services in contracts, statements of work and advertising and marketing materials. Taxpayers must remain vigilant in drafting contracts and related documentation, describing their product and service offerings (particularly in advertising materials and on websites), obtaining resale documentation and ensuring tax collection and timely remittance to the states where warranted.
Finally, the resolution of tax disputes often turns on subtle nuances or seemingly innocuous but highly relevant facts. Such distinctions are critical and can make all the difference between large, sustained tax assessments versus minimal or no change audits. As a result, remote sellers (e-commerce and otherwise) should be prudent in analyzing and assessing the risk of taxation and implementing procedures designed to minimize future state sales and use tax exposure.