South Dakota v. Wayfair, Inc. is a 2018 U.S. Supreme Court decision that gives states the right to force out-of-state sellers to collect and remit sales tax, even if they do not have a physical presence in the taxing state.
In more technical terms, Wayfair established nationwide the core of South Dakota’s “economic nexus” legislation. These laws dictate that sellers are liable for the collection of sales and use tax if they meet or exceed a state’s economic threshold. Companies reach this threshold if they do on eof the following:
Sell a certain amount of personal or electronic property into the state in a given year
Make a certain number of transactions per year in the state
While it is commonly stated that Wayfair overturned Quill Corp. v. North Dakota, a 1992 Supreme Court decision, it is more accurate in practice to say that Wayfair added to Quill.
Quill prevented states from collecting sales tax on online purchases without a physical presence in the state. Physical nexus, which we’ll discuss later, still applies as a trigger for companies to be required to register, collect and remit sales and use tax.
Put bluntly, the Wayfair decision means that online sellers need to register, collect and remit sales tax in far more states than they used to. Under Quill era rules, a seller needed a physical presence in a state to be on the hook for sales tax. Now, through economic nexus, the door is (relatively) wide open.
Nexus has also been called “sufficient physical presence.” In other words, it’s the qualifying criteria for a seller to be required to collect and pay taxes on sales in a state.
Under National Bellas Hess v. Department of Revenue and Quill (that is, until the 5-4 decision on Wayfair), only physical nexus mattered much. If a seller didn’t have a physical connection to a state, it probably didn’t have to worry about sales tax.
That’s different now.
Wayfair expanded the definition of nexus to include economic nexus, as roughly defined in South Dakota’s law. In short, now, if you sell enough in a state, there’s a chance you have to register, collect and remit sales and use tax there, regardless of whether you have any physical operations there.
Most economic nexus laws throughout the nation mirror South Dakota’s law. However, the thresholds vary. They can be as low as $10,000 per year in gross revenue, while some states are as high as $500,000. Having a large volume of sales can also trigger nexus.
Not at all. Remember how Wayfair added to, rather than replaced, Quill? Physical nexus is the law of the land in every state. If you’re operating in state, you’re going to have to register, collect and remit sales tax there.
As with economic nexus, qualifying criteria for physical nexus vary by state. Obviously, an office or a retail location will trigger physical nexus. But so can a warehouse, a remote employee or even a contractor. You could even be subject to physical nexus as an FBA seller if your products are stocked at an Amazon fulfillment center in a state. It all depends on the location.
And that’s all in addition to Wayfair‘s economic nexus, which expands the definition of nexus to include economic activity.
(Yes, it’s confusing. Which means it’s a good time to call (800) 940-9433 to talk to our sales and use tax experts. They get it.)
Naturally. Click-through nexus (also called affiliate nexus) was enacted in New York in 2008 as a Quill workaround. (The purpose of the law is obvious if you know its nickname: the Amazon Law.) In states that have adopted click-through nexus, in-state affiliates referring buyers to out-of-state sellers can trigger nexus.
Have questions about how Wayfair impacts your business? Sign up for a free consultation. Our team of sales tax experts has been working with online sellers, retailers and other businesses on state and local tax issues for decades.
Call us at (800) 940-9433, or complete this form to get started with our What’s Next sales tax discovery process. We’ll ask you for some basic information about your operations, then schedule a 45-minute call to run through your nexus footprint, your options and your next steps.