Major Change to Sales Tax: Physical Presence is not required for Sales Tax Collection in Supreme Court Ruling

July 23, 2018 News

By: Laurie J. Vitullo, CPA, Tax Manager

July 13, 2018

 

In the Supreme Court’s ruling in South Dakota v. Wayfair, Inc., a state can now require a seller to charge, collect and remit sales tax, even when they have no physical presence or nexus. This would mean the seller has a sales tax obligation even when they do not have any employees or offices outside their home state. This is major overturn to the court’s previous decisions in Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois. In those cases the online ordering and shipment of goods into the state did not create nexus, because they had no physical presence.

The court’s decisions in the prior and current case are predicated on The “Commerce Clause” which allows Congress to regulate interstate commerce. In Quill, the court used the physical presence test to determine its ruling. In the current Wayfair case, the court states that the sales tax obligation will occur “on an annual basis, if an out of state retailer delivers more than $100,000 of goods or services or engages in 200 or more separate transactions for delivery into the state.”  It could be said that this decision is based on economic nexus as opposed to physical nexus. Many states, including Pennsylvania, have previously adopted this economic nexus rule.

More guidance is expected on interpretation, procedure and administration of these rules. It will be interesting to see how other states adopt statutes that are based upon the South Dakota ruling. Meanwhile, businesses should review how it treats its multistate transactions and how they comply with the various state rules.