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ComplianceJuly 06, 2021

An updated look at the impact of the supreme court’s Wayfair decision on state sales tax laws

On June 21, 2018, life became much more complicated for businesses selling their products and services to buyers in states where they had no physical location. That was the day the U.S. Supreme Court issued its landmark decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080.

In Wayfair, the Court upheld South Dakota’s sales tax law which required remote sellers (e.g., those with no physical presence in the state, such as online businesses) to collect and remit sales taxes on in-state sales if they met a threshold amount of revenue from sales or number of sales transactions.

The real impact of Wayfair on remote sellers depended upon what the rest of the states would do. After all, the Supreme Court didn’t say a state had to impose its sales tax law on out-of-state businesses based only a threshold amount of sales activity — only that it could. And with the three-year anniversary of Wayfair upon us, it seems like a good time to review what the states have done.

Background of the Wayfair case

But first some background. The U.S. Constitution requires a connection or “nexus” between a state and a business or individual before the state can impose its tax laws on that business or individual. Until Wayfair, the Supreme Court had held that in the case of sales tax laws, a physical presence — such as a store, office, or warehouse — was required to meet that nexus requirement. This is known as a “physical nexus” requirement. What South Dakota did was replace the physical nexus requirement with an “economic nexus” requirement. That is, South Dakota was saying (and the Court agreed) that the Constitutional nexus requirement could be met if the seller had a significant enough economic impact in the state.

To be more specific, South Dakota’s law provided that a retailer would be presumed to be liable for the collection of sales and use tax in South Dakota, even if it does not have a physical presence in state, if in the previous or current calendar year its gross revenue from the sale of products or services delivered into South Dakota exceeds $100,000 or the seller sold products or services for delivery into South Dakota in 200 or more separate transactions.

The impact of Wayfair three years later

There are 45 states, plus the District of Columbia, that impose a sales tax. Back in June of 2018, only a small handful had an economic nexus sales tax law. This isn’t surprising considering such a law was presumed to be unconstitutional. And in fact, South Dakota wanted its sales tax law to be challenged, correctly figuring that the challenge would reach the U.S. Supreme Court and the Court would uphold it.

The big question back then was whether the states that had a physical nexus requirement would amend their sales tax laws to switch to an economic nexus requirement. And considering that a change like that could result in billions of dollars in additional tax revenue, it should come as no surprise that as of the 2021 three-year anniversary of the Wayfair decision, every state that imposes a sales tax had an economic nexus requirement except for one — Missouri — and legislation enacting an economic nexus law was on the Missouri Governor’s desk.

What do nationwide economic nexus laws mean for online businesses and remote sellers?

Online businesses and other remote sellers must obtain a sales tax license in every state where they are required to collect and remit sales taxes. This was true pre-Wayfair, too. The difference for many remote sellers now is that because of the economic nexus laws, they may have to register, collect, and remit in many more states. And with COVID-19 resulting in increased business for many online sellers, it may also result in their meeting the economic nexus thresholds in more states than ever before.

Unfortunately, the sales tax laws vary from state to state in how they define their economic nexus. Many, but not all states, adopted South Carolina’s thresholds of $100,000 in revenue from in-state sales or 200 separate transactions. And there are also differences in exceptions, exemptions, effective dates of the switch to an economic nexus, and other details that can make it a challenge to determine in which states sales tax collection is required.

This is why we started this article by saying that Wayfair made life much more complicated for businesses selling remotely. Getting some help with compliance is something that businesses may seriously want to consider.

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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