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Taxation in the 21st Century: Physical Presence No Longer Required for States to Assert Sales and Use Tax Nexus Against Remote Sellers

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In a much awaited decision, yesterday, the United States Supreme Court in South Dakota v. Wayfair overturned the longstanding precedent established most notably by Quill v. North Dakota which required out-of-state sellers to have physical presence in a state before the state could impose sales and use tax obligations on them.  Calling the Quill physical presence standard “unsound and incorrect,” the Court eliminated it as a prerequisite to meeting the substantial nexus test required under Commerce Clause jurisprudence.  As a result, substantial nexus between a seller and a taxing state (and, therefore, the state’s right to impose sales tax obligations) is established if the seller avails itself of the substantial privilege of carrying on business in the jurisdiction, without  the necessity of physical presence. 

The South Dakota law at issue in Wayfair applied sales tax collection and remittance obligations only on sellers that sold more than $100,000 of goods or services in South Dakota or engaged in 200 or more separate transactions for the delivery of goods and services into the state annually.  The Court determined that these thresholds could not have been met unless a remote seller availed itself of the substantial privilege of carrying on business in South Dakota, which was true in this case given the extensive virtual presence maintained by plaintiffs Wayfair, Inc. and Overstock.com.

Noting that other principles of the Court’s Commerce Clause doctrine applicable to state taxes which were not litigated or briefed by the parties might invalidate the South Dakota law, the Court remanded the case.  Although it declined to reach those issues, it signaled that the law appeared not to discriminate against or place undue burdens upon interstate commerce in light of the safe harbor established by the $100,000/200 sales threshold, the Act’s prohibition on retroactive obligations and the fact that South Dakota is a party to the Streamlined Sale and Use Tax Agreement (along with 20 other states).

The important takeaway from Wayfair  is that states now have the greenlight to enforce economic nexus standards against out-of-state retailers, including among others, on-line retailers.  Many states have already adopted laws by which they may assert nexus on remote sellers.  Those that do not are expected to quickly do so.

If you have any questions about how the Wayfair decision may affect your businesses’ state tax compliance obligations, please contact Tiffany Donio, Esq. who heads our state tax practice at tdonio@archerlaw.com or (856) 616-6147 or any member of our Tax Group in Haddonfield, N.J., at (856) 795-2121, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, in Philadelphia, Pa., at (215) 963-3300, New York, N.Y. at (212) 682-4940 or in Wilmington, Del., at (302) 777-4350.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.