In a 5-4 decision, the Supreme Court overturned the longstanding “physical presence” nexus standard for sales tax purposes in Quill. Their ruling on June 21, 2018 in South Dakota v. Wayfair allows states to require retailers to collect sales and use tax in states in which they lack a physical presence.
The Wayfair decision called into question the definition of “substantial nexus”, arguing that a business may be present in a state in a meaningful way, without being physically present in the state. The Court held that the taxpayers, while having no physical presence in the state (no offices, property, employees, contractors, sales people, etc.), had “substantial nexus” with South Dakota solely due to the volume of sales made into the state.
Many states previously enacted their own version of a “substantial nexus” standard which, without further instruction from the Court, will be upheld under the Wayfair decision. Although South Dakota focuses on pure economic nexus, which relies solely on a predetermined level of sales of gross receipts, other states have enacted nexus requirements based on affiliations with the state and reporting requirements. In 2008 New York enacted a “click-through” nexus to include any out-of-state seller who “enters into an agreement with a resident under which the resident…directly or indirectly refers potential customers…to seller” and such sales exceeds $10,000 per year.
The Quill standard may have been overturned Thursday morning, but whether the South Dakota Act in question violates the Commerce Clause on other grounds, is still left unanswered. It is unlikely we will see a review of each nexus standard anytime soon, but it is important to understand that each online and out-of-state retailer has been directly impacted and the current nexus standards enacted by various states will remain in effect.
To learn how your liability has been affected by this Supreme Court decision, contact us today.