The rise in e-commerce and the sale of products and services across state lines has radically changed states’ ability to take in sales tax revenues. On June 21, 2018, the U.S. Supreme Court upended prior precedent by ruling in South Dakota v. Wayfair that a state may impose sales tax collection obligations on a retailer that has no physical presence in that state, so long as the seller has sufficient connections – known as “nexus” – with the state. In this decision, the Court overturned its own prior precedent from 1992, which held that the Commerce Clause of the U.S. Constitution – which governs interstate commerce – prohibited states from taxing sellers that did not have any physical presence, such as a brick-and-mortar retail location, in the taxing state.
Wayfair leaves unanswered questions
But the Wayfair decision leaves unanswered questions for online retailers and companies that sell products and services across state lines. In particular, it does not define the level of activity sufficient to create nexus. The South Dakota law in question, which the court upheld, subjected remote sellers to the sales tax collection requirements if they meet one of two thresholds in either the previous calendar year or the current calendar year:
- The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000.
- The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.
Broad implications for remote sellers
The Wayfair decision will impact online retailers and remote sellers of all sizes. Many companies will be required to comply with sales tax requirements of state and local governments throughout the country, which they did not previously. In light of the Wayfair decision, remote sellers and online retailers should be aware that state and local governments are likely to either enforce existing laws requiring the collection of sales tax on e-commerce or remote transactions or adopt such legislation. Accordingly, remote sellers and online retailers should consult their tax advisors in order to review their sales tax collection obligations and compliance procedures.