How Will the Wayfair Supreme Court Decision Affect Businesses?
Toward the end of June, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc. South Dakota was asserting that Wayfair, an online retailer, owed sales tax on products sold to customers located within the state. Wayfair asserted that, since the retailer had no physical presence or connection with the state (as was required under the Court’s prior interpretations of the Commerce Clause), it was exempt from collecting and remitting sales tax. The Court ruled in favor of South Dakota.
This has monumental tax implications across the U.S. as it has paved the way for states and jurisdictions to enact laws allowing them to collect taxes from any business with "substantial nexus" within the taxing jurisdiction. Previously, substantial nexus was often considered a connection established through the presence of a property, person or other physical standard. Now 'substantial nexus' can mean economic nexus, as established through a statute defining a certain monetary threshold of sales, or transactional nexus defined by a pre-determined number of business transactions. Many states currently have laws on their books to try to envelop businesses without a physical presence, and after the recent Supreme Court ruling, we can expect to see many more.
But this recent Court decision does not mean a free-for-all taxing frenzy amongst states. In its ruling, the Court was specific about why South Dakota's economic presence law was upheld. As established in the Complete Auto case, a state tax will be upheld if it:
1. applies to an activity with substantial nexus within the taxing state,
2. is fairly apportioned,
3. does not discriminate against interstate commerce, and
4. is fairly related to the services the state provides.
In the Wayfair case, the monetary thresholds established by South Dakota's law were high enough for a business to clearly have established itself as doing business within the state and prevent undue burden on smaller businesses. Also, Wayfair was noted by the Court as a large company that "undoubtedly maintains an extensive virtual presence." In addition, South Dakota's law was not retroactive, and the state is a member of the Streamlined Sales and Use Tax Agreement, which reduces the administrative and compliance costs for taxpayers. These factors were noted by the Court when considering if the law met the Commerce Clause protections.
All businesses that sell across state borders should note this change in precedent and contact their trusted tax accountant when determining their filing requirements. If you have questions about State and Local Tax (SALT,) contact your HHM CPA today.