News Release: On June 21, 2018, the US Supreme Court ruled in the case of South Dakota v. Wayfair that physical presence is not required in order for a company to have sales tax nexus in a state.
Sales Tax Nexus?
In order for a state to require an out of state company to charge sales tax to its customers on sales of goods or services in that state and then remit the sales tax to the state government, the company must have nexus, or substantial presence, in that state. In the past, the primary method of establishing nexus was to have physical presence by having employees working in that state or property that was owned or leased in that state.
What has changed?
On June 21, 2018, the US Supreme Court ruled in the case of South Dakota v. Wayfair that physical presence is not required in order for a company to have sales tax nexus in a state. This ruling is groundbreaking because it overturns several rulings that have established physical presence as a fundamental requirement for establishing nexus. All multi-state businesses will potentially be impacted by this ruling. However, each state must still have statutes in place that establish substantial nexus. The Supreme Court ruled that Wayfair did have substantial nexus in South Dakota because it had $100,000 in sales and 200 transactions. This was not established as a threshold requirement, but did show that a threshold must be met in order for a state to levy sales taxes on a business’s goods or services sold in that state. It is important to note that while this will heavily impact companies with internet sales, this is not limited to those types of transactions.
What happens now?
In the days and months to come, each state must interpret this new nexus standard and apply it as they see fit to their state. The US Supreme Court made it clear that each state has jurisdiction over how they apply this ruling. We will monitor how states are implementing this and defining nexus. It is certain that multistate businesses will need to immediately consider the potential impact of this decision on their sales tax compliance procedures. But, this ruling is not intended to create an unrealistic burden on businesses, and some states have already come forward saying that they will be reasonable in their adoption of the new nexus rules by allowing time for companies to be in compliance. The Wayfair ruling is only the beginning of a long process of this overhaul of sales tax nexus requirements. Currently, this ruling is only affecting sales tax. However, this shift in thinking regarding state nexus and the removal of the physical presence requirement may eventually extend to the corporate state income tax laws.