Your guide to the biggest court decision in sales tax history
What is South Dakota V. Wayfair inc.?
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:
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.
What does Wayfair mean for online sellers?
What is nexus?
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.
So, is physical nexus gone?
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.)