U.S. Supreme Court Rules Physical Presence is No Longer Required for Sales Tax Nexus

By Daniel Gayer June 21, 2018

On Thursday, June 21, 2018 the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, holding that a taxpayer no longer needs to have a physical presence in a state in order to have sales tax nexus.

The Court’s ruling has broad implications for businesses and individuals nationwide. For the last 26 years leading up to today’s decision, the Court’s 1992 decision in Quill v. North Dakota held that an out-of-state business with no physical presence in a state could not be required to file sales tax returns in the state.  Today, the court explicitly overruled Quill and its physical presence requirement.

With Quill and physical presence gone as the guiding principle of sales tax nexus, the rule reverts to a more general analysis of whether a particular business’ activities in a state rise to the level of “substantial nexus.”  The court does not provide any bright-line definition of substantial nexus, so it will be left to states and taxpayers to determine what exactly this means in any particular situation.

The Court did, however, favorably cite several key elements of the South Dakota law at issue as establishing reasonable safeguards to ensure that it will only apply to taxpayers with substantial nexus and not be unduly burdensome:

1. Minimum annual filing threshold of $100,000 in total sales or 200 separate transactions.
2. No retroactivity.
3. South Dakota has adopted the Streamlined Sales and Use Tax Agreement and provides access to sales tax software paid for by the state.

While these factors provide some level of protection for small businesses, we anticipate that most small to mid-sized companies with multistate sales, and some very large companies previously protected by a limited physical footprint, will now have sales tax nexus in more states than they did in the past, and will need to allocate a significant amount of time and resources in the near future to come up with a new or updated sales tax compliance strategy that fits with the new law and the specific facts and needs of their business.

It remains to be seen how each state will respond, but we anticipate that states will move quickly to begin capturing sales tax revenue. Some state legislatures have previously passed sales tax laws like South Dakota’s, and those will go into effect immediately, with more states likely to enact similar laws in the near future.

In recent years, we have also seen states trying to get around the physical presence requirement with ideas such as “click through” nexus, nexus based on software “cookies,” or onerous use tax reporting regimes. With this ruling, these arcane requirements may no longer apply and will hopefully be replaced with more straightforward statutes similar to South Dakota.

The Court also suggested that Congress may act to provide some uniform parameters around minimum sales thresholds or other such structures to protect small businesses from excessive tax compliance burdens. Several bills proposed in recent years have attempted to do this, but so far none have made it through Congress. Today’s decision will certainly increase the pressure and urgency for Congressional action, but when and if this will translate to enacted law is anyone’s guess at this point.

This is an emerging issue and the State and Local Tax (SALT) Team at BNN will be closely monitoring any new developments. Please contact Merrill Barter, Nick Smetana, or Daniel Gayer at 800.244.7444 if you have questions about how you or your business may be affected by these tax changes.