It is time to set aside the rules relating to sales tax nexus that have been in place for several decades. Times are changing!
On June 21, 2018 the US Supreme Court issued a decision in South Dakota vs. Wayfair, overturning a sales tax standard that dated back to a 1992 ruling in the Quill court case. In the 2018 Wayfair case, the court determined that the physical presence rule that evolved from the Quill case was unsound and incorrect.
The physical presence rule set forth the standard for whether a state can require an out of state retailer to collect and remit sales tax. Unless a retailer had a physical presence such as property or people in a state, the state could not require the seller to collect and remit sales tax. With the rise in digital commerce, many retailers did not meet physical presence requirements and therefore did not collect and remit taxes in a state even when they had a high volume of sales in that state. This gave these retailers a significant advantage over brick and mortar stores who were required to collect sales tax.
The Wayfair case ruled that physical presence is not the correct standard. Rather that when a retailer “avails itself of the substantial privilege of carrying on a business in that jurisdiction” they have substantial nexus and must collect sales tax. The US Supreme Court stated that substantial nexus can be created by “economic and virtual contacts” within a state and overruled the physical presence test.
Since the June 21 decision, several other states have enacted detailed notice and reporting laws for out-of-state retailers. Various states base their requirements on a dollar threshold or a number of transactions threshold or other criteria. Retailers, particularly online sellers, can expect to see a rapid expansion in the number of states that will require them to collect and remit sales tax. The penalties for not complying can be stiff, so it is important that sellers understand the requirements. If you would like more information on the changing sales tax environment, please contact us.