Tax Alert: Supreme Court Overturns the Physical Standard for Sales Tax Nexus.
June 26, 2018
Last week, the United States Supreme Court issued its decision in South Dakota v. Wayfair (" Wayfair").  In a 5-4 ruling, the majority of the court held that the standard established in Quill v. North Dakota  requiring a taxpayer to have a physical presence in a state before the state can require it to charge, collect, and remit sales tax was "unsound and incorrect".   ( See Whitley Penn Tax Alert:  U.S. Supreme Court to Hear Challenge to Long-Standing Sales Tax Physical Presence Requirement - March 28, 2018).

The majority opinion, delivered by Justice Anthony Kennedy, stated that the physical presence standard is not necessary to create a substantial nexus that would require a taxpayer to charge, collect, and remit a state sales tax.  The long-standing physical presence test was established before the prevalence of online sales and provided an advantage to larger taxpayers that conduct business in multiple states but limit their physical presence to one or two states.  It is important to note that although much of the mainstream media attention regarding Wayfair has been focused on internet retail sales, the decision applies to all taxpayers that sell tangible personal property into a state where they have no physical presence. 

Another consideration to be resolved is whether the "economic nexus" principles of the Wayfair decision eventually will be applied to state income tax as well.  A few states have already adopted an economic nexus standard for income tax based on the number or dollar amount of sales into those states.  The states that have not adopted the standard may now consider its implementation after the concept was held to be constitutionally sound in the Wayfair ruling.

Taxpayers must now quickly assess how the ruling will impact their state tax burden.   Several states already have begun the process of implementing economic nexus legislation for sales tax in anticipation of the Wayfair decision and the remaining states will likely follow suit in the immediate future.   Therefore, it is critical that taxpayers begin preparing immediately to implement all the required steps and processes necessary to comply with the economic nexus standard for each state in which they conduct business.

Whitley Penn's SALT practice understands that this ruling will present a challenging transition for taxpayers that conduct business in multiple states.  We recommend that you contact our SALT group [Dallas Packer, Director: (214) 393-9319] or your Whitley Penn tax advisor as soon as possible to begin planning for the implementation of the new law.  The SALT group will continue to monitor this issue and release new updates as significant developments occur. 
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