Authored By James L. Hamilton
Contact 847.441.8800
Email: jhamilton@weisscpa.com

U.S. Supreme Court Agrees to Hear Challenge to the Physical Presence Requirement for Sales Tax Nexus

The United States Supreme Court agreed to hear the case of South Dakota v. Wayfair Inc., setting the stage for possible changes to the physical presence requirement for sales and use tax nexus. The Court’s decision likely will address whether the state can impose a sales tax collection and remittance obligation on sellers that do not have a physical presence in the state, effectively affirming or overturning the long-standing precedent established in Quill Corp. v. North Dakota.

The Supreme Court’s acceptance of review opens the door to possible changes in the way states impose sales and use tax collection obligations on out-of-state and/or online retailers that make sales into states in which they have no physical presence. If the Court determines that the South Dakota statute is lawful, states would be allowed to implement economic nexus standards, and impose collection obligations based on factors other than physical presence. Many states have passed economic nexus legislation in preparation for a successful challenge to Quill. Several states have enacted similar economic nexus provisions to South Dakota that dispense with the physical presence requirement.

These provisions would require companies to compare sales against a state’s economic nexus provisions as a bright-line test for determining nexus, with or without a physical presence in the state. While this may reduce uncertainty as to whether a company has nexus with a state, it may result in an increased nexus footprint for many companies and a significant jump in compliance obligations. For a company with extensive national sales, this potentially could require significant additional compliance at the state level.  Preparation to accommodate this sharp increase in filings will be necessary to properly process sales transactions and collect the correct amount of tax from customers.

Businesses should be prepared to review their current tax calculation methodology and consider options for implementing technology to address the increase in compliance responsibilities.

Taxpayers should stay current with sales tax economic nexus developments as additional litigation related to the state legislation may be likely.

If you have any questions about economic nexus provisions and related developments that could result from the decision in this case, please do not hesitate to contact one of our tax professionals.


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