Supreme Court Revisits Physical Presence Test for Sales and Use Tax Purposes
On Friday, January 12, 2018, the U.S. Supreme Court granted certiorari in South Dakota v. Wayfair, Inc., which concerns the physical presence standard for sales tax nexus established in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
As established in Quill, nexus (the minimum presence for which a state can impose its taxing jurisdiction) for sales tax purposes is determined based on a taxpayer’s physical presence (e.g., property or personnel) located in a jurisdiction. As such, online retailers have traditionally only collected sales tax on sales to customers from states where they have a physical presence. By their very nature, many online sellers have very little physical presence in most states and are therefore not required to collect sales tax in many jurisdictions.
Of course, given the explosive growth in e-commerce in the years since the Quill decision, many states believe that online sellers enjoy an unfair advantage over in-state retailers since they are not required to collect sales tax. Accordingly, states have tried, with mixed success, to attribute a physical presence to online sellers through the actions of others, including so-called “affiliate nexus” and “click-through nexus,” for example.
In 2017, however, Alabama and South Dakota adopted rules that required online sellers to collect the tax in certain circumstances even if the sellers had no physical presence in the state (known as “economic” nexus). These rules are directly contradictory to the Quill standard. Not surprisingly, the rules were challenged in both states. The first case to reach the U.S. Supreme Court is the above-mentioned South Dakota v. Wayfair, Inc. case.
If the Supreme Court rules in favor of South Dakota, states would be allowed to require out-of-state 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!
Please call or email us at aliguori@alvarezandmarsal.com for further insight on this topic!
Author: Brian Pedersen
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