South Dakota v. Wayfair, Inc.: The Supreme Court's 2018 State Tax Ruling Explained

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The world of retail was rocked on June 21, 2018, when the Supreme Court of the United States (SCOTUS) ruled a business’s economic activity in a state could trigger an obligation to collect and remit tax there.

This is an unusual departure from precedence. The court ruled in 1967 (National Bellas Hess v. Department of Revenue of Illinois) that physical presence was a prerequisite for nexus, the connection between a business and state that triggers a tax obligation. It upheld that decision in 1992 (Quill Corp. v. North Dakota).

But the world of commerce has changed significantly since those rulings, which predated the birth of ecommerce. In the years since the launch of Amazon, it's become exponentially easier for a seller in one state to reach customers in all other states. Consumers can now browse a world’s worth of products, and purchase them, without leaving home.

With the rise of ecommerce and the constraint on taxing remote sales, state governments have seen sales tax revenue flatten or decrease. And so, they picked up where Illinois and North Dakota left off: They started broadening their tax laws to capture more revenue from remote sales, basing nexus on in-state affiliate relationships (affiliate nexus), referrals from state residents (click-through nexus), the presence of software on in-state devices (cookie nexus), and economic activity (economic nexus).

The South Dakota law that sparked South Dakota v. Wayfair, Inc. is one such law.

Economic nexus
Under South Dakota SB 106, nexus is established when an out-of-state business has more than $100,000 in gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota, or 200 or more separate transactions of the same. SCOTUS finds this to be a sufficient basis for nexus.

This sparked a lot of questions from retailers, including:

What types of companies are affected by the SCOTUS decision?
South Dakota’s economic nexus law applies to businesses that lack a physical presence in South Dakota, make sales in the state through the internet or some other means, and meet one of the thresholds described above. It does not affect in-state businesses that already collect and remit sales tax, or remote businesses with no South Dakota customers.

How soon do I have to start collecting sales tax in South Dakota?
Although the United States Supreme Court ruling was a victory for South Dakota, the state can’t yet enforce its economic nexus law because the State Circuit Court placed it under an injunction. SCOTUS sent the case back to the South Dakota Supreme Court for further legal proceedings, and that will take some time.

Does the decision in South Dakota v. Wayfair, Inc. mean I need to collect and remit sales tax in all states?
More than a dozen states have adopted an economic nexus provision similar to South Dakota’s law, and they’re starting to enforce them. In Hawaii, Kentucky, and Vermont, enforcement began July 1, 2018. Illinois and North Dakota plan to enforce their economic nexus laws as of October 1, 2018, while Connecticut will start on December 1, 2018, and Iowa on January 1, 2019. Change is happening rapidly, and the pace will likely pick up once more state legislatures are back in session.

Does physical presence still trigger a sales tax obligation?
Yes, the SCOTUS decision does not impact sales tax laws surrounding physical presence.

Do I need to worry about other types of expanded nexus?
The SCOTUS decision was specific to economic nexus. Whether states will try to use the ruling to enforce other types of nexus, such as affiliate or click-through nexus, remains to be seen.

Still have questions? Learn more about South Dakota v. Wayfair, Inc. and its potential impact on your business here.

Avalara helps businesses of all sizes achieve compliance with transactional taxes, including sales and use, VAT, excise, communications, and other tax types. The company delivers comprehensive, automated, cloud-based solutions that are designed to be fast, accurate, and easy to use. https://avlr.co/2mqFyK8

Posted July 23, 2018

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