Reversing longstanding precedent, on June 21, 2018, the U.S. Supreme Court released its decision in South Dakota v. Wayfair, Inc., holding that states may require a remote seller of goods to collect sales tax on products delivered to buyers in the state even if the seller does not have a physical presence in that state. Wayfair overturns the Court’s previous decisions in Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill. (1967), which had established the “physical presence” test.
A commercial business generally could have avoided collecting states tax for out-of-state sales by limiting its physical presence to its home state or states of operations. States responded to such strategies by imposing use taxes on in-state customers that purchase goods from out-of-state sellers that do not collect sales tax. States found, however, that use taxes suffered from low compliance and collection rates because they are difficult to enforce.
In Wayfair, the Supreme Court retained the general requirement that a seller must have “substantial nexus” to a state for a state to impose sales tax collection obligations on the seller. While the Court indicated that the “physical presence” bright-line test is no longer required to establish “substantial nexus,” the Court declined to establish a replacement standard (remanding this determination to lower courts). The Court noted, however, the following favorable factors contained in the applicable sales tax legislation:
- Sales tax collection is imposed on a remote seller only if the seller has more than $100,000 in sales or at least 200 sales transactions in the state;
- Imposition of the new rules is not retroactive; and
- The state is party to an inter-state agreement which streamlines and simplifies compliance obligations.
Although sellers no longer have the protection of the “physical presence” test to avoid collecting sales tax, the Court confirmed the retention of a minimum nexus standard. Accordingly, uncertainty exists regarding application of the Wayfair decision among previously existing - and recently enacted - state sales tax laws intended to impose collection obligations on remote sellers without physical presence and whether these rules may be applied retroactively.