South Dakota v. Wayfair

South Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions.

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Background

A taxpayer must have “nexus”—some sort of adequate connection—with a state for that state to impose tax obligations. Before Wayfair, states could only require a company to collect and remit sales tax if it had some kind of physical presence in the state.

Many states sought to employ expansive, if sometimes legally dubious, definitions of physical presence to permit them to impose collection and remittance obligations on at least some remote sellers. States adopted “click-through nexus” standards where the in-state presence of an affiliate was sufficient to establish nexus, or experimented with “cookie nexus,” on the theory that placing a cookie on an in-state user’s computer constituted physical presence.

These efforts, however, were incomplete and legally tenuous, and states long sought express authority to require out-of-state sellers to collect sales tax on their behalf. Failing to secure a federal legislative framework, states ultimately turned to the Supreme Court, with carefully crafted South Dakota legislation used as a test case.

In Wayfair, a 5-4 Supreme Court overturned prior physical presence requirements, establishing that an economic presence in a state could be sufficient. States are, however, still constrained by broader constitutional requirements, most notably that their laws neither discriminate against nor unduly burden interstate commerce.

State Remote Sales Tax Authority Post-Wayfair

Although the Court’s ruling was limited to the nexus question, Justice Anthony Kennedy, writing for the majority, strongly suggested that South Dakota’s law would survive scrutiny under the Dormant Commerce Clause of the U.S. Constitution due to design elements intended to avoid discrimination against or undue burdens on interstate commerce. The highlighted features of South Dakota’s law included a safe harbor for small sellers, a lack of retroactivity, single state-level administration, uniform definitions of products and services, and software for sellers with immunity for any errors arising from reliance on it. These favorable references provide states with important guidance in developing their own remote sales tax frameworks.

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