U.S. Supreme Court Tosses Out the Physical Presence Requirement for Sales Tax Nexus: What Now?

In South Dakota v. Wayfair, Inc., et al., 585 U.S. __ (June 21, 2018), the U.S. Supreme Court overruled its 1992 decision in Quill Corp. v. North Dakota which held that a state cannot require an out-of-state sellers with no physical presence in the state to collect and remit sales taxes on goods and taxable services provided to customers located in the state. The Supreme Court noted that the physical presence requirement has become unworkable in the Cyber Age. However, the court's ruling not only affects online retailers, including foreign retailers, but all sellers of taxable goods and services who make sales into a state in which they lack a physical presence.           The specific question at issue in Wayfair was whether South Dakota may require remote sellers with more than $100,000 in annual sales in South Dakota or more than 200 transactions with South Dakota residents to collect and remit sales tax in the absence of any further connection with the state. Although the Supreme Court unequivocally decided that a physical presence is not necessary to create a "substantial nexus" (taxable presence) justifying the imposition of a sales tax, the Court declined to adopt a new sales tax nexus standard. Instead, by eliminating the physical presence requirement for sales tax nexus and upholding the South Dakota law, the Court established a threshold for the constitutionality of state nexus standards, but did not provide clear guidelines as to what other state nexus standards might be constitutional. Accordingly, there is no clear nexus standard today.IMMEDIATE EFFECTS FOR REMOTE SELLERSRemote sellers should refrain from hastily registering in each state in which they transact sales. There will be an adjustment period during which the Wayfair opinion is digested by the states and taxpayers alike to understand its practical implications. A number of states will likely issue legislative or administrative guidance outlining the principles pursuant to which they expect remote sellers to collect and remit the sales tax. Some states may decide to simply issue a bulletin informing remote sellers that they are now expected to register and collect sales tax. It should also be expected that states will generally increase audit enforcement in reaction to the Wayfair decision. Because there is still no clear nexus standard, there remain various potential arguments to challenge the states' authority to impose their laws on remote sellers, increasing the need for Federal legislation in this area. Ultimately, as states are increasingly able to require remote sellers to collect and remit sales tax, remote sellers who historically have not collected sales tax will now have to implement sales tax compliance procedures and will no longer maintain a competitive advantage over traditional retailers. ANTICIPATED STATE REACTIONSThe Supreme Court's decision will likely encourage states to adopt similar laws to South Dakota's because they would be able to do so with certainty that the law will withstand constitutional scrutiny. Specifically, in considering the constitutional validity of the South Dakota law, the Court summarized that the South Dakota nexus standard (1) requires businesses whose sales exceed the safe harbor threshold of $100,000 in annual sales or 200 separate transactions to collect sales tax; (2) does not apply retroactively; and (3) is effective in a state that is party to the Streamlined Sales and Use Tax Agreement (SSUTA). South Dakota is one of more than 20 states that have adopted the SSUTA, which standardizes taxes to reduce administrative and compliance costs. SSUTA requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the state. Sellers who choose to use such software are immune from audit liability.CURRENT STATE ECONOMIC NEXUS STANDARDSIn addition to South Dakota, seven other both SSUTA and non-SSUTA states - Illinois, Indiana, Kentucky, Maine, North Dakota, Vermont and Wyoming - have adopted economic nexus thresholds similar to those adopted by South Dakota. Thus, any remote seller that exceeds the South Dakota thresholds most likely has a sales tax compliance obligation in at least these eight states.Seven additional states - Alabama, Georgia, Iowa, Massachusetts, Mississippi, Ohio and Tennessee -have adopted economic nexus thresholds that vary from those adopted by South Dakota. It remains to be seen whether these laws will be enforced as is, or modified to reflect South Dakota-style provisions. As for the remaining 31 states that impose a state sales tax, they will have to determine whether their existing laws provide a sufficient "economic nexus" basis through which to assert jurisdiction over remote sellers of taxable goods and services, or whether they must amend their laws to adopt the South Dakota standard, or attempt an even lower threshold, perhaps even with retroactive application.Six states - Alabama (effective Jan. 1, 2019), Minnesota, Oklahoma, Pennsylvania, Rhode Island and Washington State have adopted marketplace nexus provisions, under which remote sellers, as well as marketplace facilitators (such as Amazon) are subject to notice and reporting requirements or may elect and to remit sales tax if they exceed certain annual sales thresholds ranging from $10,000 to $250,000, despite a lack of physical presence in the state. Pursuant to these laws, Amazon has agreed to collect and remit sales tax on behalf of all remote sellers for sales made on its platform.POTENTIAL FOR CONGRESSIONAL ACTIONNoting the concerns regarding the complexity of multistate sales tax compliance, the Supreme Court noted that "eventually, software that is available at a reasonable cost may make it easier for small businesses to cope with these problems.... And in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so." Currently, there are several pieces of legislation before Congress that address multistate tax compliance issues of online retailers, and the chances for such legislation may be improved by the Wayfair decision. These include the following:

• The Marketplace Fairness Act (MFA), as presented in its revised version by Senate legislators in 2017, would give states more power to collect sales taxes from businesses that do not have a physical location within their borders, so long as the state participates in the Streamlined Sales Tax Project (which developed the SSUTA), or implements the simplification requirements and liability provisions of the MFA. The MFA is completely voluntary for states, provides a small seller exception, and would require a minimum six month waiting period before a state can begin requiring remote sellers to collect sales tax.

• The Remote Transactions Parity Act (RTPA) of 2017, presented by legislators in the House of Representatives, authorizes states to impose sales tax collection obligations on certain remote sellers for sales, regardless of physical presence, so long as the state participates in the Streamlined Sales Tax Project, or implements the simplification requirements and liability provisions of the RTPA. The RTPA is also completely voluntary for states, provides a small seller exception, and would require a minimum six month waiting period before a state can begin requiring remote sellers to collect sales tax.

Neither the MFA nor the RTPA addresses how the legislation applies to remote sellers in foreign countries.It is likely that Congress will wait to see how the states and taxpayers respond to the Wayfair decision before it takes any action, a process that could take several years. In the meantime, remote sellers, including foreign sellers, should determine whether a sales tax nexus exists or the risk of nexus has materially changed because of the Wayfair decision. Specifically, they should consider their historical sales by state; and nexus creating activities under existing state nexus provisions (e.g., affiliate marketing programs). If they come to the conclusion that a substantial risk of non-compliance exists, the Wayfair decision should serve as a wake-up call to (1) resolve any historical exposure proactively (and anonymously through Voluntary Disclosure Agreements); (2) implement sales tax compliance software solutions and processes; and (3) implement processes for tracking sales activity to determine when they exceed sales thresholds in states that adopt economic nexus standards. For further information please contact:Maureen R. Monaghan: maureen.monagahn@wg-law.com; (212) 509-6312