Multi-State Tax News U.S. Supreme Court Overrules Longstanding Sales Tax Nexus Requirements in its Recent South Dakota v. Wayfair, Inc. DecisionJuly 20, 2018

By: Edward Rigby, CPA, MST

On June 21, 2018, in a highly anticipated U.S. Supreme Court decision, the court overturned longstanding multi-state nexus rules requiring what is referred to as a “physical presence” test to be met in a state before that state could require an out of state business to collect and remit sales tax. Two key Supreme Court cases, Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois have provided the fundamental judicial doctrine for decades having required an out of state business to have a “physical presence”, e.g. a place of business, employees, or other business property in a state, before such state could impose its sales and use tax requirements on the out of state business. In the modern economy, internet sales are frequently and typically made into states where the company does not have any physical presence while enjoying significant sales volume. State tax administrators and legislators view the e-commerce or “click through” economy as costing millions of dollars in lost sales tax revenue.

As states work to increase their tax revenues to meet increasingly higher spending budgets, they have become increasingly aggressive in challenging the old physical presence standards. For example, states such as California have imposed taxes based on sales volume in their state even if no physical presence is established. States have attempted to impose sales tax collection requirements on out of state businesses through “affiliate nexus” or “amazon rules” for e-commerce companies. For example, a New Jersey business with an affiliate company located in California could be subject to California sales tax due to certain sales solicitation activities on behalf of the New Jersey business by its California affiliate. South Dakota imposed a sales tax requirement based on a minimum sales volume ($100,000 of goods or services delivered into the state or engaging in 200 or more sales transactions). Thus, an out of state business would be responsible for sales tax collection even though it has no employees or property in the state if the sales volume requirements are met. The South Dakota sales tax statute was the focus of the Supreme Court case.

The U.S. Supreme Court upheld the South Dakota sales tax statute in its recent decision, effectively overruling the longstanding prior court doctrine requiring physical presence. Thus, taxpayers who sell tangible property over the internet or who otherwise have no physical presence in the state need to carefully consider their multi-state tax requirements and discuss these multi-state issues with their tax advisors. In New Jersey, both houses of the state legislature have introduced sales tax bills that are similar to the South Dakota statutes. Numerous states are likely to introduce similar sales tax law changes. The impact of the Supreme Court Decision in overruling the longstanding prior case law will create increased complexity in administering a company’s state tax responsibilities as well as the necessity of avoiding unexpected adverse tax consequences resulting from sales into other states.
The tax advisors at the Curchin Group are well versed with the increasingly complex maze of multi-state tax requirements and are available to advise you and your business.

Please contact us should have any additional questions regarding this topic. Call us at (732) 747-0500 or email info@curchin.com.