United States

Wayfair, sales tax, and economic presence laws

Determining when to collect and remit sales tax just got harder



On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, overturning the long-standing "physical presence” nexus standard established through Quill v. North Dakota in 1992. With the Wayfair decision, the Court has opened up the possibility for states to impose sales and use tax collection and remittance responsibilities on remote sellers based solely upon their economic presence in a state.

How did we get here?

Historically, state budgets have relied heavily on sales and use taxes, evidenced by the fact that aggregate sales and use tax collections account for more than 30 percent of total state tax revenues. Sales and use taxes are some of the most stable and reliable as a revenue stream—with aggregate national collections only falling during periods of significant economic downturn such as the recession of 2008.

Not surprisingly, states have attempted to expand sales and use tax collections through a variety of strategies, including:

  • increasing rates (often unpopular and unsuccessful with voters)
  • expanding the sales tax base to professional services and other traditionally exempt items
  • increasing “sin taxes” (sales taxes on cigarettes and alcohol)
  • requiring use tax notification and reporting of remote sellers
  • pushing the boundaries of traditional sales and use tax nexus concepts

But for states to reap the financial benefit of sales and use tax, there must be a reliable system in place to capture that revenue. Traditional laws requiring physical presence quickly became insufficient when paired with the exponential growth of online and remote sales. The result is what we see in today’s marketplace, buyers moving away from brick-and-mortar shopping to online purchases, and states left to watch what was once valuable revenue escape.

In attempt to combat this lost revenue, states have enacted new sales and use tax nexus laws in response to the changing digital economy (and tax revenue lost due to remote commerce) through concepts such as “click-through nexus,” so-called “cookie nexus,” and employing broader applications of affiliate nexus. Most significantly, however, states began to directly challenge the physical presence nexus standard laid out in the 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota.

In his concurrence to the U.S. Supreme Court’s 2015 opinion in Direct Mktg. Ass’n v. Brohl—a case out of Colorado challenging use tax reporting requirements—Justice Kennedy concluded that tax loss from the combination of individuals’ use tax noncompliance and far-reaching systemic and structural changes in economic and social activities due to expanding use of the internet indicated a need for the court to revisit the Quill physical presence standard. Kennedy called for the states to provide the court with a case suitable to address whether the rationale in Quill is still viable in the modern world. The states moved quickly in response.

South Dakota v. Wayfair

On March 22, 2016, and likely in response to Justice Kennedy’s concurrence, South Dakota Governor Dennis Daugaard signed Senate Bill 106, a statute that imposes an “economic sales tax nexus standard” on out-of-state sellers. Specifically, the statute obliges remote sellers to collect and remit sales tax if they have more than $100,000 of sales to, or engage in 200 or more transactions with, South Dakota customers—even if the remote seller has no physical presence in the state. The South Dakota Department of Revenue subsequently began mailing notices to remote sellers requiring collection and remittance of sales taxes on sales to South Dakota customers. The notices were followed by the Department filing a declaratory judgment action against three remote internet retailers in Hughes County Circuit Court. That action automatically enjoined the enforcement of the law during the pendency of the litigation.

After an attempt to hear the case in federal court failed, the Hughes County Circuit Court struck down the law. The South Dakota Supreme Court subsequently affirmed the Circuit Court's decision in September 2017. On Jan. 12, 2018, the U.S. Supreme Court granted the state’s petition for certiorari, agreeing to hear the challenge to physical presence nexus. On June 21, 2018, the Court eliminated the physical presence requirement entirely, replacing the Quill standard with the four-part Commerce Clause test established under Complete Auto Transit, Inc. v. Brady in 1977. States became free to enact their own economic sales tax nexus provisions.

Importantly, the Wayfair litigation was remanded to the state of South Dakota because the U.S. Supreme Court did not fully examine South Dakota’s law under the Complete Auto test—an analysis left for the South Dakota courts. Additionally, it should be noted that Wayfair does not establish South Dakota’s “200 transactions with or $100,000 in sales to in-state customers” standard as a constitutional minimum, opening up the possibility that other states could utilize lower thresholds.

Economic sales and use tax nexus landscape

How does the economic sales tax nexus landscape look today?

Approximately one month after the Wayfair decision, half of the states that impose a state-wide general sales tax had addressed economic sales tax nexus. Over a dozen of those provisions were in effect at that time, with other states beginning their economic sales tax nexus enforcement on Sept. 1, Oct. 1, Nov. 1, and Dec. 1, 2018, and Jan. 1, 2019. State guidance has been provided weekly since the decision.

A number of states anticipate future guidance or enforcement as taxing authorities consider a regulatory response or issuing new policy. Over 40 state legislatures have already ended for the year, meaning enacting economic sales tax nexus provisions through statutes would require either waiting until 2019 legislative sessions, as some states will likely choose to do, or calling special sessions. However, many states moved forward with enforcement through regulation or policy, rather than legislation.

Through the end of July, the following states have enacted an economic sales tax nexus statute, promulgated a regulation, or issued final guidance impacting remote sellers post-Wayfair: Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, and Wyoming. These states have varying effective dates and compliance requirements – each provision must be independently analyzed. Additionally, new states are addressing economic sales tax nexus on a weekly basis, or revising their previous positions, and this list will likely be much longer in only a few weeks.

Pending state litigation on identical or similar economic nexus provisions

Several states are currently involved in litigation over their respective economic sales tax nexus provisions in state court including Indiana, Tennessee, and Wyoming. Many of those challenges were stayed pending the Wayfair decision because the provisions were identical, or substantially similar, to that of South Dakota’s law. In consideration of the Wayfair decision, Quill arguments in those cases may be moot, although other claims may be asserted against each state’s specific provision. Both Indiana and Wyoming anticipated an Oct. 1, 2018 enforcement date, pending the resolution of litigation in each state.

Federal legislative remote-seller solutions

Congress may overrule the U.S. Supreme Court’s decision in Wayfair by exercising its constitutional power to regulate commerce between the states. Congress could codify the Quill physical presence standard into federal law, or enact a system of remote seller collection such as the frequently discussed Marketplace Fairness Act. However, many of the proposals previously introduced have not made it out of the House Judiciary Committee.

On July 24, 2018, the House Judiciary Committee held a hearing to consider testimony on whether the House should address remote sales tax collection. Due to the timing of the Wayfair decision (Congress faces elections and U.S. Supreme Court confirmations, for example), other Congressional business will likely take priority over any federal remote seller proposal. It appears to be increasingly unlikely that Congress will address Wayfair in 2018. If no further federal action is taken in 2018 to address remote sales tax collection, it is possible the committee will have a dramatically different makeup in 2019, possibly leading to a different approach for a federal remote seller sales tax solution.

At least four proposals aimed at solving the remote sales tax collection issue have been introduced in the current Congress. These proposals will need to be reintroduced if not acted on in 2018:

  • Marketplace Fairness Act of 2017 (S.976)
  • Remote Transactions Parity Act of 2017 (H.R. 2193)
  • No Regulation Without Representation Act of 2017 (H.R. 2887)
  • Stop Taxing Our Potential (STOP) Act of 2018 (S.3180)


The Wayfair appeal moved through the court system at a blistering pace. Even with a decision from the nation’s highest court, very little is settled. Under the U.S. Constitution’s Commerce Clause, Congress may have the authority to implement a remote seller solution or codify the physical presence standard into federal law. Whether Congress takes up the issue is a “wait-and-see” proposition.

Even with the death of Quill’s physical presence standard, sales tax nexus expansion is nevertheless far from certain. New litigation stemming from Wayfair is likely, and the decision’s effect will ripple through the states in the coming weeks and months. What is certain is that the sales tax nexus landscape will be changing very quickly and preparation will be key.

Wayfair creates many more questions than it seeks to answer. Understanding how sales tax nexus may affect your business is extremely important.

Taxpayers should speak to their state tax advisers about the impact of the Wayfair decision on their business. Implications will be felt by industries well beyond retailers.


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