Supreme Court Overturns "Physical Presence" Standard for Sales Tax Nexus

Recently, the Supreme Court issued a shocking 5-4 decision in South Dakota vs. Wayfair, which overturned the "physical presence" standard for determining Sales Tax nexus. The physical presence nexus standard had been the law of the land for sales tax collection since the Quill vs. North Dakota case in 1992.  

Nexus, also known as physical presence, is the determining factor of whether an out of state business selling products into a state is liable for collecting sales tax on sales into the state. A majority of the supreme court felt that the physical presence test had become less reflective of actual economic reality each year with the continuing rise of internet sales and e-commerce. The court ruled that substantial nexus can be established on the basis of both economic and virtual contacts with the state such as targeted advertising, electronic sales, downloading of apps, and the deposit of cookies on customer computers.

Though the Supreme Court remanded this case back to South Dakota to determine if South Dakota's nexus standard discriminates against interstate commerce, it appears that a definite shift has occurred in determining what is nexus for sales tax, and possibly, corporate income tax purposes.

At this time, it is unclear how quickly other individual states will react to this change. However, we believe it is fair to assume states will become more and more aggressive at collection in the future. It is also unclear if Congress will seek to step in to clarify the issue of exactly what creates substantial nexus in a state.

We will continue to monitor the situation and keep you informed of any changes.

Very truly yours,

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