On June 21st, 2018, the U.S. Supreme Court Ruled on South Dakota vs. Wayfair, Inc. This decision brings significant changes to long-established precedent related to sales and use tax Nexus standards. In its ruling on Wayfair, the Supreme Court overruled decades of established law that required vendors to have a physical presence in a state before that state could require them to collect and remit sales tax on purchases by customers within the jurisdiction.
Wayfair, Inc. is an internet retailer without a physical presence in South Dakota, a state which enacted a law targeting out-of-state retailers for sales and use tax. The physical presence requirement goes back as far as 1967 and was later confirmed in a 1992 case, “Quill Corp vs. North Dakota.” Under these previous cases, it was determined that states could not require business with no physical presence in a state to collect sales tax on the basis of the court’s interpretation of the commerce clause of the U.S. Constitution. The Court, in deciding Wayfair, acknowledged that the physical presence rule of “Quill” is unsound and incorrect. That changes how business is now conducted by creating an unfair competitive advantage of online retailers.
The Wayfair decision opens a discuss among State Governments as to what action to take and how to proceed to ensure that their particular laws ensure collection of tax revenue. Wayfair could very well be the beginning of a long line of eases on state tax jurisdiction.
So, what should businesses, particularly, remote sellers do?
First, review their policies and procedures regarding sales tax in judication in which it does business particularly those in which it lacks a physical presence. Second, ensure that their accounting systems and processes can identify such transactions. Finally, it would be wise to considerw its exposure to potential claims. Naturally, professional advice may be required.
There is one final thought…to the extent a state is able to establish that a business has been selling in its state and, therefore, in addition to looking for sales tax, it may be looking for an income tax return.