Questions remain, actions needed after US Supreme Court overturns physical presence nexus rule

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June 2018

Overview

On June 21, in a 5-4 decision, the US Supreme Court overruled prior Court decisions that had precluded states from imposing a sales and use tax collection obligation on sellers unless they had a physical presence in the state.  [South Dakota v. Wayfair, Inc. et. al. No. 17-494]

Constitutional nexus standards require that a state tax can apply only to an activity with a ‘substantial nexus’ with the state.  In Wayfair, the Court concluded that nexus is ‘clearly sufficient’ where South Dakota imposed a sales tax collection and remittance requirement on a seller, where, on an annual basis, the seller (1) delivers more than $100,000 of goods or services into the state or (2) engages in 200 or more separate transactions for the delivery of goods or services into the state.

The case was remanded to the South Dakota Supreme Court for further proceedings, which could address the application of other Commerce Clause arguments challenging the constitutionality of the state’s law.

Many open questions and considerations remain following the Wayfair decision.

The takeaway

The Wayfair decision is expected to increase state nexus expansion, and sellers with no in-state physical presence will need to address the impact. The number of states where companies must collect and remit sales and use tax likely will increase. Accordingly, companies will need to understand what goods and services are taxable in the new filing jurisdictions and implement procedures to manage the increased number of filings. Immediate consideration should be given to states with existing economic nexus laws that may seek to enforce such laws.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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