The U.S. Supreme Court handed down its decision in South Dakota v. Wayfair – the case that challenged the imposition of sales taxes on remote sellers that lacked a physical presence in state. Until today’s ruling, states were prohibited from imposing sales and use taxes on businesses lacking an in-state physical presence. Today’s Supreme Court decision changes the physical presence requirement, and states can now require taxpayers to collect and remit sales tax based on the taxpayer’s economic presence in the state.
What is Nexus?
For state tax purposes, nexus generally means the threshold of contact that must exist between a taxpayer and a state before the state has jurisdiction to impose taxation. The U.S. constitution requires that there be some minimum connection between a state and the person, property or transaction it seeks to tax, and that there be a substantial nexus between the taxed activity and the taxing state before a state can impose taxation. What constitutes substantial nexus has been an issue of controversy, and until today, for sales tax purposes, the Court mandated a bright line test of physical presence based on their 1992 decision in Quill Corp. v. North Dakota. In recent years, states have blatantly defied the physical presence test with economic nexus legislation. According to The Tax Foundation, the nation’s leading independent tax policy research organization, 31 states already have some form of economic nexus rule for sales and use tax purposes.
What is Economic Nexus?
Economic nexus regimes have taken several forms from click-through nexus to internet “cookies” nexus, or in the form of a notice and reporting requirement. The South Dakota law at issue in Wayfair requires out-of-state sellers with at least 200 separate sales transactions or $100,000 in sales to South Dakota’s residents in the current or prior calendar year to collect and remit South Dakota’s state and local sales taxes; 17 states have similar but varied economic nexus laws.
What This Means for Your Business
Today’s decision by the Supreme Court will impact any business selling or providing services across state lines. Businesses will no longer be able to control their sales tax exposure by managing where they have a physical presence, and will need to start closely monitoring their economic activity in any state.
There are more than 10,000 sales tax jurisdictions in the United States between state, county, city and district levels; each with its own tax rules for how and when sales taxes should be collected. Miller Cooper & Co. Ltd. has a team of sales tax professionals ready to help. Please call us to discuss how this landmark decision may impact your business.