The Supreme Court of the United States (SCOTUS) provided some guidance in 1992 with its ruling in Quill v. North Dakota. In Quill, SCOTUS ruled a state could only require remote retailers to pay a state sales tax if the retailer had a physical presence within the state. It went on to provide examples of physical presence which included the use of a warehouse, brick and mortar store or headquarters within the state.
A lot has changed since 1992. In 2018, critics argued this holding was no longer relevant. This led to a new challenge. South Dakota decided to push the limits and begin to require payment of a state sales tax. This led to the most recent case to question this issue, South Dakota v. Wayfair. Ultimately, SCOTUS found in favor of the state sales tax. In Wayfair the justices ruled that sales alone are enough to create nexus for sales and use tax purposes and that a physical presence is no longer required. Two examples of the criteria listed in the holding included:
- Look forward. States could only apply the tax to current and future transactions. The tax could not be applied retroactively.
- Significant online presence. The tax should not apply to businesses that conduct minor transactions within the state. The state tax used by South Dakota applied to those that conducted $100,000 in transactions or 200 or more separate transactions. This established a precedent that businesses that conduct significant transactions are likely eligible to pay a state sales tax.
This decision expands the basis upon which states can collect sales and use taxes from internet retailers who do not have a physical location or presence within their state. Forty-one states filed briefs in the Wayfair case in support of taxing out-of-state retailers based on sales activity; the question as to whether or not Congress will take additional action remains. Regardless, the ruling is a call for ecommerce retailers to review their selling activities and future tax reporting and compliance strategies. Due to the complicated nature of this are of law, it is wise to seek legal counsel to better ensure you take all potential tax issues into account in your revised tax plan.