SOUTH DAKOTA V. WAYFAIR, INC.

Your Guide to the Biggest Court Decision in Sales Tax History

It's almost impossible to look for information about state sales and use tax without finding reference to South Dakota v. Wayfair, Inc. Here's everything you need to know about the momentous 2018 Supreme Court case that established the sales tax landscape retailers and eCommerce sellers know (and don't really love).

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 essentially established nationwide the core of South Dakota’s “economic nexus” legislation, which dictates that sellers are liable for the collection of sales and use tax if they:

  • Sell a certain amount of personal or electronic property into the state in a given year, or;
  • 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

Quil prevented states from collecting sales tax on online purchases without a physical presence in the state. Physical nexus, which we’ll discuss in some depth later, still applies as a trigger for companies to be required to register, collect and remit sales and use tax.

Fun Fact: It’s a complete coincidence that two major Supreme Court decisions affecting sales tax law originated in the Dakotas.

What Does Wayfair Mean for Online Sellers?

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. 

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, 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 thresholds 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. 

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 there, you’re going to be required to register, collect and remit sales tax. 

As with economic nexus, qualifying criteria for physical nexus varies 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.)

Are There Any Other Types of Nexus?

Naturally. Click-through nexus (also called affiliate nexus) was enacted in New York in 2008 as a Quill workaround. (The purpose is obvious from the law’s 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.

That Might Affect Me. Or Not. What’s Next? 

Peisner Johnson has your back. Our team of sales tax experts has been working with online sellers, retailers and other businesses on state and local tax issues for decades. 

If you have questions about how you’re impacted by Wayfair, we’d love to chat. Call us at (800) 940-9433, or click the button at the bottom of this page 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.

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