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Morris Manning & Martin, LLP

Sales Taxes: The Supreme Court’s Wayfair Decision

08.08.2018

What was the law being challenged in Wayfair? 
Wayfair (along with other remote retailers) was challenging South Dakota’s economic nexus law which imposes tax collection and remittance requirements on out-of-state sellers of certain goods or services meeting gross sales and transaction volume thresholds in the state without regard to whether the retailer met the “physical presence standard” in the state (the South Dakota law applies to sellers that, on an annual basis, deliver more than $100,000 of covered goods or services into the state or engage in 200 or more separate transactions for the delivery of covered goods or services into the state).

What is the “physical presence standard?” 
Before a state can impose a tax liability and filing responsibility on an out-of-state entity, it must show that the entity’s activities within the state are sufficient to support an assertion of jurisdiction over the entity’s person or property. For sales tax purposes, this jurisdictional threshold (commonly referred to as “nexus”) was historically satisfied only by the physical presence of people or property in the state. Under the prior holdings of the Supreme Court in Quill v. North Dakota[1]and National Bella Hess v. Department of Revenue of Ill.,[2] in order for a state to impose a requirement for an out-of-state seller to collect and remit sales tax on sales within the state, the out-of-state seller had to have a physical presence in that state (generally meaning people or property physically present in the state, even if only present temporarily, or some other physical presence with the state).

Wayfair Supreme Court ruling
In issuing its decision in South Dakota v. Wayfair,[3] the Supreme Court rejected the “physical presence standard” established in Quill and National Bella Hess, finding the standard to be an “unsound and incorrect” interpretation of the Commerce Clause.

What is the standard after Wayfair? 
The Supreme Court determined that the correct standard in determining the constitutionality of a state law imposing tax collection and remittance requirements on out-of-state sellers is whether the law applies to a seller that has “substantial nexus” with the taxing state (as described in Complete Auto Transit v. Brady[4]). This means that states are now generally permitted to enact or enforce laws that require remote sellers without a physical presence in the state to collect and remit sales taxes with respect to sales within the state.

What to expect going forward  
An expert panel at the National Conference of State Legislatures reported on July 29, 2018 that 24 of the 45 states with a sales tax are in different stages of requiring remote out-of-state sellers to collect sales taxes, with some of the states currently enforcing laws on the books at the time of the Wayfair decision. Taxpayers should expect most if not all of the remaining states to move forward with enforcing existing legislation or enacting new laws that require remote sellers to collect and remit sales taxes. To minimize the risk of constitutional challenge, most of the states are likely to adopt legislation that is not significantly inconsistent with South Dakota’s law. 

What does this mean for SaaS Companies and other remote sellers? 
SaaS companies should revisit the statutes and monitor legislative activities in each state where they have sales to determine sales tax collection and remittance requirements.  To the extent a SaaS company had previously been relying on the physical presence standard to avoid collecting and remitting sales tax, it may need to begin collecting and remitting such tax immediately if required to do so under the specific state statute.



[1] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
[2] National Bellas Hess, Inc. v. Department of Revenue of State of Ill., 386 U.S. 753 (1967).
[3] South Dakota v. Wayfair Inc.,et al, No. 17-494, slip. op. (2018).
[4] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).