Legal Alert: United States Supreme Court Decision South Dakota v. Wayfair represents a significant change to sales tax
The United States Supreme Court decision in South Dakota v. Wayfair represents a significant change to state sales tax administration. In order for a state to be able to require a business to collect sales tax in that state, the business or activity must have a substantial nexus with the taxing state. Prior to Wayfair, a physical presence within the state was generally required to meet this substantial nexus requirement. Wayfair overturned the physical presence requirement, and, now, the applicable test is an economic nexus test related to whether a business has availed itself of the substantial privilege of conducting business in the taxing jurisdiction. The Court took into account the drastic changes in technology and e-commerce in recent years and reasoned that, for the purpose of showing a nexus with a state, virtual connections to a state cannot be ignored and a pervasive online presence in a state is not analytically different from the presence of brick-and-mortar retailers.
Wayfair does not set forth bright line rules to determine whether a business has a sufficient economic nexus with a state to require collection of sales tax. Unless Congress enacts legislation to establish national standards, it will be up to each state to update its laws to address economic nexus with the state. Because the South Dakota law in question was approved by the Supreme Court, it is likely that other states will model their laws on the South Dakota law. Therefore, the South Dakota law likely provides some insight on how states may approach the new economic nexus standard. Specifically, the South Dakota law only applies to businesses that, on an annual basis, deliver more than $100,000 of goods or services into the state or have more than 200 separate transactions in the state. If a business surpasses this minimum level of contact with South Dakota, it will be deemed to have an economic nexus with the state. Businesses that only have minor contacts or isolated small transactions within a South Dakota are not deemed to have an economic nexus in the state.
As a result of this decision, it is likely that many more states will adopt sales tax laws similar to that in South Dakota in an effort to collect additional revenue from online sellers. In addition to the above nexus requirements, any such state laws must not unfairly burden interstate commerce and must be related to the services that the state provides. Thus, overly complex state tax systems or those that unduly affect small business with only minimal contact to a state are not likely to be upheld.
Despite the questionable enforceability of such laws prior to Wayfair, there are already several states that have enacted laws with an economic nexus type test. In these states, online sellers would be required to collect and remit sales tax if its sales meet the minimum amounts in each state regardless of whether it has a physical presence, agents or representatives in the state. Online sellers need to adjust. It is likely most states will pass economic nexus laws to increase their cut of sales tax revenue.
Reach out to your attorney or contact Michael Durham, Tax Section Chair, at 801-321-4836 for tax information specific to your business needs.