On June 21, 2018, The U.S. Supreme Court, with a 5-4 majority, overruled the 1992 Quill physical presence nexus requirement for the collection of state sales taxes. The Court offered an answer in its stead: States have broad authority to require online retailers to collect sales taxes, using an economic nexus as their guide.
In South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., the Supreme Court did put an end to Quill, with Justice Kennedy writing for the majority, “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U. S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), are overruled.”
In Wayfair, the Court acknowledged that the physical presence rule has long been criticized as giving out-of-state sellers an advantage. And, the Court noted, Quill put local and interstate businesses with a physical presence—those brick-and-mortar stores—at a competitive disadvantage relative to remote sellers. And as the world has changed, especially as it applies to technology, the rule has become “further removed from economic reality.”
In the Wayfair opinion, Justice Kennedy suggested a state’s law could be constitutional if:
- the state installed a threshold that recognizes a “substantial nexus,” (such as the South Dakota's more than $100,000 in sales or 200 separate transactions on an annual basis.)
- the state didn’t push for retroactive back taxes, and
- the state is a member of the SSUTA.
Please note that there are some definitions offered at the end of this article for term clarification.
At Issue
Companies which made sales over the internet were still subject to the same sales tax collection requirements as so-called brick and mortar stores. Generally, the test was whether the company had a physical presence in that state: If a company had a physical presence in a state, they were required to collect and remit sales taxes. The test was the result of the 25-year-old Supreme Court ruling in Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992). In Quill, the Court ruled that only those companies with a physical presence inside a state can be required to collect sales tax.
Wayfair throws out the physical presence requirement. As South Dakota works toward implementation of the High Court's decision, many project that other states will copy South Dakota’s model.
Status by State - With Economic Nexus
Most states with South Dakota-type laws are either moving ahead with their laws or already consider them to be in place. Those that were contingent on South Dakota will have to wait for the South Dakota Supreme Court to issue an opinion on remand, which is expected in August.
The following list shows the states with economic nexus laws already in place. The list shows the name of the state first; the effective date of their law; their threshold of "substantial nexus"; and whether the state is a member of SSUTA (the Streamlined Sales and Use Tax Agreement):
- Alabama (Jan 1, 2016), $250,000 in in-state sales ; [No]
- Colorado (July 1, 2017), statement issued by retailer for $500 or more annually; [No]
- Connecticut (July 1, 2018), 200 transactions or $250,000 in in-state sales; [No]
- Georgia (Jan 1, 2019), 200 transactions or $250,000 in in-state sales; [Yes]
- Hawaii (July 1, 2018) 200 transactions or $100,000 in in-state sales; [No]
- Idaho (July 1, 2018) $10,000 a year in in-state sales; [No]
- Illinois (Oct 1, 2018) 200 transactions or $100,000 in in-state sales; [No]
- Indiana (July 1, 2017) 200 transactions or $100,000 in in-state sales; [Yes]
- Iowa (Jan 1, 2019) 200 transactions or $100,000 in in-state sales; [Yes]
- Kentucky (July 1, 2018) 200 transactions or $100,000 in in-state sales; [Yes]
- Louisiana (June 21, 2018) 200 transactions or $100,000 in in-state sales; [No]
- Maine (Oct 1, 2017) 200 transactions or $100,000 in in-state sales; [No]
- Massachusetts (Oct 1, 2017) 100 transactions or $500,000 in in-state sales; [No]
- Minnesota (contingent on Wayfair ruling) No Threshold Set; [Yes]
- Mississippi (Dec 1, 2017) $250,000 in in-state sales; [No]
- Missouri ( Jan 1, 2013) $10,000 in in-state sales; [No]
- North Carolina (Aug 7, 2009) $10,000 in in-state sales; [Yes]
- North Dakota (Oct 1, 2018) 200 transactions or $100,000 in in-state sales; [Yes]
- Ohio (Jan 1, 2018 pending litigation) $500,000 in in-state sales; [Yes]
- Oklahoma (April 10, 2018) $10,000 in in-state sales; [Yes]
- Pennsylvania (April 1, 2018) $10,000 in in-state sales; [No]
- Rhode Island (Aug 17, 2017) 200 transactions or $100,000 in in-state sales; [Yes]
- South Dakota (contingent on state’s Supreme Court approval, following high court Wayfair decision) 200 transactions or $100,000 in in-state sales; [Yes]
- Tennessee (July 1, 2017 pending litigation) $500,000 in in-state sales; [Yes]
- Vermont ( July 1, 2018) 200 transactions or $100,000 in in-state sales; [Yes]
- Washington (Jan 1, 2018) $10,000 in in-state sales; [Yes]
- Wisconsin (Oct 1, 2018) 200 transactions or $100,000 in in-state sales; [Yes]
- Wyoming (July 1, 2017) 200 transactions or $100,000 in in-state sales; [Yes]
Status by State - Without Economic Nexus
The following states don’t have an economic nexus regime like South Dakota’s, but this is a fluid situation as of this writing. If you have interest in one of these states, please check with the state's department of revenue for the latest movement in dealing with the Wayfair implications.
- Alaska, has no sales tax
- Arizona
- Arkansas, member of the SSUTA.
- California
- Delaware, has no sales tax.
- Florida
- Kansas, member of the SSUTA.
- Maryland
- Michigan, member of the SSUTA.
- Montana, has no sales tax.
- Nebraska, member of the SSUTA.
- Nevada, member of the SSUTA.
- New Hampshire, has no sales tax.
- New Jersey, Bills introduced to adopt law identical to South Dakota; Collection obligation to begin first day of calendar quarter 90 days following enactment; member of the SSUTA.
- New Mexico
- New York, legislation is being considered.
- Oregon, has no sales tax.
- South Carolina
- Texas
- Utah, member of the SSUTA.
- Virginia
- West Virginia, member of the SSUTA.
Definitions:
Nexus is a legal term for a connection.
Nexus determination is controlled by the U.S. Constitution under the Due Process Clause and the Commerce Clause. The Due Process Clause requires a definite link or minimum connection between the state and the person, property or transaction it seeks to tax. However, the Commerce Clause requires a higher level of connection. The Commerce Clause requires a substantial presence in a taxing state by the entity the state desires to tax.
Nexus (under Quill), also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state.
Economic presence nexus is generally based on whether a business has an economic presence in a state by directing economic activity in the state, or by having income from sales to customers in the state.
What is 'Quill'? It is most commonly referred to as two U.S. Supreme Court cases: Quill Corp. v. North Dakota, 504 U. S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753. The Court held that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.
Streamlined Sales and Use Tax Agreement (SSUTA) The purpose of the Agreement is to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance. Today twenty-four states have adopted the simplification measures in the Agreement.
The Supreme Court Ruling of South Dakota v. Wayfair, Inc., et al., may be found here: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf
Please contact your Smolin advisor for assistance in the interpretation of Wayfair, and how you and your state are being impacted by this latest Supreme Court ruling. We will assist you in any transitional aid that may be needed.