The Wayfair Decision

Historically, the U.S. Supreme Court said that physical presence was needed in a state in order for that state to impose a sales tax collection responsibility on a business.  Physical presence generally means an office, store, warehouse, other assets, employees, or other representatives of the company performing services or soliciting in a state.  If a business lacked physical presence, it had no responsibility to collect sales tax for that state.  This changed after June 2018 with a new Supreme Court ruling

South Dakota v. Wayfair, Inc., which addressed South Dakota’s new sales tax nexus law enacted in May 2016, changed things.  The legislation addressed the problem that many states are having of reduced sales tax collections due to internet sales.

The Wayfair case involved three internet sales companies – Wayfair, Overstock, and Newegg – that were fighting South Dakota’s 2016 law, which is an economic nexus law rather than physical nexus.  The law says that a company has nexus in South Dakota if it has over $100,000 in sales or 200 transactions delivered into South Dakota.

The South Dakota law applies to the sales of tangible personal property, products transferred electronically, or services for delivery into South Dakota.  It is based on the customer’s location and the amount of sales rather than the location of the seller.  The ruling applies to all sellers – not just online sellers.  It applies to drop shipments, international sellers, software as a service (SaaS) and/or software license agreements, services (e.g., information services), and wholesalers.

The U.S. Supreme Court decided that physical presence is not needed to create nexus.  Since physical presence is not required for sales tax nexus, almost all states have changed their laws to be in line with South Dakota’s law.

The Wayfair decision addresses sales tax law; however, the decision seems to support economic nexus for corporation tax/income tax as well.  This mainly applies to companies with sales of services, digital goods, and intangibles.  Public Law 86-272 protects the sales of tangible property (with no physical presence, or with the presence of a sales person) from a state tax on net income.  However, if a company meets any nexus thresholds selling tangible property, states can charge a privilege tax or a minimum tax.

It is important to keep your CPA apprised of all states in which you are doing business including states where the company has no physical presence.  This includes states you are selling/delivering into and states where you have employees or other physical presence.