The Wayfair Decision - How Will It Affect You and Your Business?

Chris Freeman, Katz Teller

On June 21, 2018, the United States Supreme Court issued its highly anticipated opinion in South Dakota v. Wayfair, Inc., et. al., a case closely watched by tax professionals due to its expected impact on thresholds employed by state tax authorities to determine when, and if, retailers have established nexus with their state for sales and use tax compliance purposes. In Wayfair, the Court issued a 5-4 decision eliminating the “physical presence” rule of prior Court precedents Quill Corp. v. North Dakota and National Bellas Hess, Inc. vs. Department of Revenue of Ill, and thereby dramatically altered the sales and use tax landscape – a development that, directly or indirectly, will impact nearly every seller and consumer. 

Now, more than a month later, what are the practical effects of this decision? What, if anything, should companies with an online presence and/or multi-state operations be doing to prepare?

What did (or will) the Wayfair decision change?

In general, under prior law (the aforementioned Quill and National Bellas Hess cases, among others), state jurisdiction regarding sales tax depended on the substantiality of a potential taxpayer’s physical presence in, and connections with, a state. Prior to Wayfair, application and enforcement of these thresholds had long been subjective and inconsistent among the states and therefore unwieldy for both state governments and taxpayers.

In Wayfair, the Court considered a newly enacted South Dakota statute that required ‘economic nexus’ for sales and use tax collection purposes rather than a specific physical presence. According to the relevant South Dakota statute, economic nexus exists (and therefore a seller must comply, by collecting and remitting sales tax) when either (1) the seller’s South Dakota sales of goods or services exceed $100,000; or (2) the seller engages in more than 200 separate transactions for the delivery of goods or services in South Dakota. Upon reaching either threshold, a seller must comply with South Dakota sales tax laws.

The Court considered South Dakota’s economic nexus thresholds in light of constitutional Commerce Clause principles regulating interstate commerce – under which principles Quill’s physical presence test had become the standard. Ultimately, the Court determined both that:

  1. The physical-presence test was an invalid interpretation of the Commerce Clause (thereby overruling that standard), and 
  2. South Dakota’s thresholds for economic nexus passed constitutional standards.

In making these determinations, the Court has presented a clear path for states to reconsider when a potential taxpayer should be required to collect and remit sales tax based on the materiality (and/or regularity) of business activity in a state. However, and importantly, the Court did not expressly determine what those standards should, or could, be – those matters will now be determined by state legislatures and potentially, Congress.

What to expect.

The Court’s Wayfair decision will result in states reconsidering and likely, redefining, nexus standards for state sales tax purposes using economic materiality thresholds. We expect that states will move quickly to implement new regimes which define nexus in accordance with, or similar to, the South Dakota statute at issue in Wayfair – on economic terms rather than dependent upon a physical presence. That said, physical presence may likely remain one manner of establishing nexus within a jurisdiction. It’s possible that Congress (which has considered legislation on this issue before) may also become involved, which could result in application of a uniform standard with respect to nexus.

Could ‘new’ nexus standards be applied retroactively?

In general, tax statutes are very rarely applied retroactively, especially when such statutes establish new standards for their application. Almost certainly, a new statute that purports to apply retroactively would be subject to intense legal challenge and scrutiny, including because such an application would be unfairly punitive to those affected, not to mention burdensome on commerce.

What should multi-state and/or companies with an online presence be doing?

The Wayfair decision will expand the universe of companies subject to tax in multiple states due to the prevalence of online sales. Companies that previously relied on a lack of physical presence as a bar to state tax collection and remittance should be consistently monitoring efforts of state governments to redefine and implement state tax nexus. Other affirmative compliance measures (i.e., proactive registration, collection and remittance in some states) may be warranted in certain circumstances.

Overall, remaining in touch with your tax professional(s) is highly important as these matters evolve to ensure that you and your company are prepared to comply with new standards when implemented.