Physical Presence No Longer Required to Establish Substantial Nexus for Sales/Use Tax
Today, the U.S. Supreme Court overturned the physical presence test for sufficient nexus in the collection of sales and use tax. The 5-4 decision in the case of South Dakota v. Wayfair, Inc., 585 U.S. ____ (2018) overruled prior Court decisions in National Bellas Hess, Inc. and Quill Corp. under which a state may not require a business to collect its sales tax if the business lacks a physical presence in the state. The challenged law required out-of-state sellers to collect and remit sales tax "as if the seller had a physical presence" in South Dakota, but applied only to sellers delivering more than $100,000 of goods or services into South Dakota annually or engaging in 200 or more separate transactions for the delivery of goods or services into the state. The respondents were online retailers with no employees or real estate in South Dakota.
In rejecting the physical presence test, the Court held that physical presence was not necessary to establish substantial nexus with the taxing state, that it created market distortions, and that it imposed an arbitrary, formalistic distinction in conflict with modern Commerce Clause precedents. The Court also held that the South Dakota law met the substantial nexus requirement based on the "economic and virtual contacts" respondents had with the state that resulted in a quantity of business that could not have occurred without "the seller having availed itself of the substantial privilege of carrying on business in South Dakota."
The dissenting opinion argued the rules of remote sales should be addressed by Congress.
Businesses should consider the quantity of sales into states in which they do not have physical presence to evaluate whether sales tax should be collected and remitted. Forty-one states, two territories and the District of Columbia requested the Court reject the Quill standard, so businesses should expect action from the states in implementing and enforcing sales tax laws with minimum sales tests similar to South Dakota's.