Printable versionSend by emailPDF version
June 21, 2018


On June 21, 2018, the U.S. Supreme Court issued an opinion (South Dakota v. Wayfair Inc., et al, 585 U.S. (2018)) holding that a physical presence in a state is no longer necessary for a state to require an out-of-state retailer to collect sales tax within the state. This decision overturns decades of precedent.

As a result, interstate sellers will have to collect sales tax on sales to jurisdictions, regardless of whether or not the sellers have any physical presence (property or personnel) in the state. Previously, such physical presence was required in order for a state to impose a collection responsibility upon a taxpayer.

In Wayfair, the Court held that the taxpayers in question had “substantial nexus” with South Dakota due to the volume of sales made into the state. The Court noted that the South Dakota statute exempted sellers with less than $100,000 in sales and less than 200 separate transactions in the state in explaining that the taxpayers’ level of activity in South Dakota was substantial. Further, the statute in question bars a retroactive application of the collection responsibility.

Questions and uncertainty remain, however. It is unclear what level of sales activity in a state is sufficient to comprise “substantial nexus” with a particular state (the Court merely concluded that it existed in the instant case). Further, it is possible that many states may attempt to impose similar statutes retroactively.

Original Article:

In the decades since the physical presence nexus standard for use tax collection was established by the U.S. Supreme Court decision in Quill Corp. v. North Dakota in 1992, electronic commerce has grown to enormous proportions. Thanks to the physical presence rule established for remote sellers in Quill, many online sellers have not been required to collect tax in all states where the seller has customers. Some say online sellers have an unfair advantage over brick and mortar sellers who cannot escape the requirement to collect tax. While states have long waited for Congress to step in to legislate a solution, such proposed legislation rarely gains traction in Congress. With the U.S. Supreme Court now having agreed to hear the South Dakota v. Wayfair, Inc., case, the Quill physical nexus standard and the various means by which states have sought to make end-runs around that standard, may all soon change. What should remote sellers do in the meantime?

In recent years, states have reacted with increasingly innovative tactics to better capture the commerce directed toward their marketplaces. They have tried various approaches to attributing a physical presence to online sellers and, more recently, have passed legislation designed to directly challenge the Quill decision. On Friday, January 12, 2018, the U.S. Supreme Court granted certiorari in South Dakota v. Wayfair, Inc. Later this year, the Supreme Court will render a decision in South Dakota v. Wayfair, Inc. that may modify the Quill decision, allow it to stand, or overturn the decision entirely. In the meantime, remote sellers must contend with the already unwieldy physical nexus rules as well as various approaches that have been developed by select states in conferring use tax nexus, which are outlined below.

Constitutional Law

Traditional Sales and Use Tax Nexus Based on Entity’s Activities:

  • In the Quill case, the Supreme Court reaffirmed its earlier finding in the National Bellas Hess case, which stated that “substantial nexus” for sales and use tax purposes is physical presence of property and/or employees physically entering the state on a regular and systematic basis. Therefore, a seller must have a physical presence in the taxing state before the state can require the seller to collect its use tax. National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), Quill Corporation v. North Dakota, 504 U.S. 298 (1992).
  • A seller’s activities can be subject to use tax collection requirements if the seller has physical presence in the taxing state, even if the seller's activities in the state have no relation to the transaction being taxed. National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977).

Traditional Agency Sales and Use Tax Nexus:

In-state activities performed on behalf of the seller by third parties and/or related parties could result in agency nexus for the seller. Scripto v. Carson, 262 U.S. 207 (1960), in Tyler Pipe Indus., Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232 (1987). Together with the cases noted earlier, these U.S. Supreme Court decisions preclude a state from asserting the duty to collect sales or use tax upon an out-of-state seller absent proof that the out-of-state seller itself, or through an agent or representative soliciting on the out-of-state seller’s behalf, is physically present in the state.

Various State Approaches to Asserting Nexus

“Click-through” Nexus

In 2008, New York was the first state to enact a law that presumes agency sales tax nexus for out-of-state vendors with certain third-party e-commerce relationships, wherein the vendor compensates the in-state third party for a sale referred to the vendor via a web link on the third party’s website or other Internet location.

About 20 states have now enacted similar laws, which are typically deemed “rebuttable” presumptions and specify annual sales thresholds from referrals within the statutory language that triggers the statute. Departments of Revenue in states that have not enacted such legislation are not precluded from asserting sales tax nexus on sellers with click-through arrangements under existing Constitutional case law.

Affiliate or “Alter-ego” Sales Tax Nexus

“Affiliate” sales tax nexus, sometimes called “alter-ego” nexus, is a different concept of nexus and another means by which a jurisdiction can assert sales tax nexus on an out-of-state seller that is related to a legal entity that has sales tax nexus with that jurisdiction. While jurisdictions tend to assert agency nexus on out-of-state sellers more often, jurisdictions are aware of legal structuring that organizations employ to “structure around” the requirement to collect sales tax. Some have reacted accordingly with “affiliate” nexus legislation to “pierce the corporate veil” between related legal entities.

For example, New York’s affiliate sales tax nexus law confers sales tax nexus on “A seller of tangible personal property or services, the use of which is taxed by this article if either (I) an affiliated person that is a vendor as otherwise defined in this paragraph uses in the state trademarks, service marks, or trade names that are the same as those the seller uses; or (II) an affiliated person engages in activities in the state that inure to the benefit of the seller, in its development or maintenance of a market for its goods or services in the state, to the extent that those activities of the affiliate are sufficient to satisfy the nexus requirement of the United States constitution.”

Accordingly, even when a related company avoids performing agency-nexus-creating activities on behalf of a related, out-of-state company, their common ownership and other facts, such as use of common trademarks, can result in nexus for the out-of-state seller. About 20 states have enacted legislation similar to New York’s affiliate nexus statute, some of which was enacted instead of but most of which was enacted in addition to these states’ “click through” (agency) nexus statutes. Also, similar to agency nexus, the absence of an affiliate nexus statute does not preclude a Department of Revenue from asserting affiliate nexus on sellers who would otherwise not have nexus based on their own activities.

Other Sales Tax Nexus-Related Developments

“Marketplace provider”: Arizona has interpreted in a ruling that the in-state physical presence of certain types of online “marketplace provider” arrangements creates Arizona nexus for customers who utilize certain such online marketplaces to sell their products. Arizona Transaction Privilege Tax Ruling 16-1, September 20, 2016.

State Reporting and Notification Laws

In 2010, the Colorado General Assembly approved H.B. 10-1193, which requires “non-collecting retailers” to notify Colorado customers that the retailer does not collect Colorado sales tax and that the purchaser is obligated to pay use tax to the Colorado Department of Revenue, to provide an annual purchase summary to each Colorado customer and to provide the Department with an annual customer information report. Penalties apply for each instance of non-compliance.

A non-collecting retailer is a retailer that does not have the requisite physical presence to be required to collect and report Colorado sales and use tax. Following enactment of the law, a series of court challenges by a retailer industry group ensued, culminating in a ruling by the U.S. 10th Circuit Court of Appeals that Quill’s physical presence requirement did not apply to Colorado’s reporting obligations.

“Economic Nexus” Laws

Alabama and South Dakota are examples of states that have enacted “economic presence” statutes similar to statutes for income/franchise tax nexus, which specify annual sales thresholds under which sellers that don’t otherwise have an in-state physical presence are required to collect the state’s sales and use tax. Tennessee is an example of a state that does not have such a statute, but rather the Tennessee Department of Revenue promulgated a regulation to the same effect that requires out-of-state sellers to become registered and to start collecting Tennessee sales and use tax in 2017.

South Dakota was one of the first states to enact legislation challenging Quill, under which sellers must remit tax if they have $100,000 or more of gross revenue from sales in the state, or if they have 200 or more separate transactions in the state. In South Dakota v. Wayfair, Inc. (6th Circuit, March 6, 2017), the state trial court enjoined the state from enforcing the law, stating that it was “duty bound to follow applicable precedent of the United States Supreme Court…even when changing times and events clearly suggest a different outcome.” Wyoming and Indiana enacted similar statutes, effective July 1, 2017. Vermont and North Dakota also enacted similar statutes, which will become effective only if Quill is overturned.

On Friday, January 12, 2018, the U.S. Supreme Court granted certiorari in South Dakota v. Wayfair, Inc., making the Wayfair case the first use tax nexus case to reach the U.S. Supreme Court since the Quill decision in 1992. If the Supreme Court rules in favor of South Dakota, states would be allowed to require remote sellers to collect sales tax regardless of whether a physical presence exists in those states. This would be a sweeping change to the current standard.

Alvarez & Marsal Taxand Says:

Now is the time for remote sellers to revisit their current use tax nexus profile, determine and quantify any use tax exposure that may exist, make plans to remediate such exposure, and plan for a potential Wayfair decision in which the seller may face the burden of having to comply with use tax in more jurisdictions. Preparations such as planning for the implementation of a new sales tax solution or optimizing a current sales tax solution, as well as updating policies and procedures for controlling use tax and obtaining exempt documentation from customers, will require consideration.

Remediation of use tax exposure may be achieved by way of entering into a voluntary disclosure agreement (VDA) with a state or taking advantage of any ongoing state amnesty programs, which allow for a seller to come into compliance in an orderly manner and can allow for abatement of penalties and interest reduction and sometimes interest abatement.

The battle between states hoping to get their share of tax revenue and out-of-state sellers trying to reduce their use tax compliance burden is now facing a new chapter with the 2018 Wayfair decision. Forewarned is forearmed; no time is ever a good time, but sellers should use this time between now and the Wayfair decision to prepare for a potentially adverse outcome.


The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisers who are free from audit-based conflicts of interest and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the United States and serves the United Kingdom from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisers in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit or

Related Issues:

How to Deal with Auditors: Getting Ahead of Sampling Problems in Sales & Use Tax Audits

When a company is undergoing a sales and use tax audit, the use of sampling procedures by the auditor can be daunting and can sometimes result in unplanned difficulties for the company. It is extremely important to get ahead of the game and to ensure that the use of sampling procedures does not inadvertently create undue problems for the company.

Impact of Potential Tax Reform on State Tax Codes

Since the release of the House Republican tax reform “Blueprint” in June 2016, which was shortly followed by the release of the Trump proposal later that summer, there has been endless discussion of the proposed tax reform and what the ramifications will be at the federal level.